FHA loans let you buy a 2–4 family with 3.5% down if you live in one unit. For three- and four-unit homes, the property must also pass the self-sufficiency test, and it's the rule that most often stops triple-decker buyers.
Who Has to Pass It
The test applies to FHA purchases of 3- and 4-unit properties. Single-family homes and duplexes don't need it. You still have to live in one of the units, and every unit counts in the test, including yours.
How the Test Works
The lender takes the appraiser's market rent for every unit and subtracts a vacancy factor: the greater of the appraiser's vacancy estimate or 25%. What's left is the net self-sufficiency rent. It must be at least the full monthly payment.
Rent for all units × 75% ≥ PITI (principal, interest, mortgage insurance, taxes, insurance, and any HOA dues)
If the appraiser's vacancy factor is higher than 25%, the lender uses that larger deduction instead.
Two details catch buyers off guard:
- It uses the appraiser's rents, not the seller's rent roll or your projections. On a fixer-upper, that usually means current, as-is rents.
- The payment includes FHA mortgage insurance: an upfront premium of 1.75% added to the loan, plus an annual premium paid monthly.
Worked Example: Pass
A triple-decker priced at $700,000, with the appraiser estimating $2,600 per unit.
- 3.5% down: $24,500; base loan $675,500, plus 1.75% upfront premium = $687,321
- 30-year loan at 6.25%: about $4,232 principal and interest
- Annual mortgage insurance at 0.55%: about $310 a month
- Taxes $9,000 a year and insurance $3,000 a year: $1,000 a month
- PITI: about $5,542
- Net rent: 3 × $2,600 × 75% = $5,850
$5,850 is at least $5,542, so the property passes.
Worked Example: Fail
Same house, but the appraiser estimates $2,400 per unit.
- Net rent: 3 × $2,400 × 75% = $5,400
- PITI is still about $5,542
$5,400 is less than $5,542, so the property fails. To pass, total market rent would need to be about $7,390 a month, or the payment would need to drop.
If a Property Fails
- Negotiate a lower price, or ask for a seller credit toward the rate (a rate buydown).
- Put more than 3.5% down to lower the payment.
- Choose a duplex, which doesn't need the test.
- Switch to a conventional loan, which has no self-sufficiency test, if you can meet its down payment.
Mortgage insurance rates and FHA loan limits change, and limits vary by county. Check current figures with your lender or HUD before you make an offer.
Sources
- HUD Single Family Housing Policy Handbook 4000.1
- FHA Self-Sufficiency Test for 3- and 4-Unit Properties, MortgageResearch.com
Educational information only, not financial, lending, legal or tax advice. Lender programs, rates and tax rules change; confirm with your lender, attorney or tax advisor. See the disclaimer.