FHA Self-Sufficiency Test For 3- and 4-Unit Properties 2024

Buying a multi-unit house with an FHA loan is a fantastic idea.

With one motion, you become a homeowner and a real estate investor.

What’s more, your bottom-line monthly payment might be less than if you purchase a single-family home, thanks to rental income.

But before making an offer on a 3- or 4-unit home, make sure it passes the FHA self-sufficiency test.

Highlights

• The FHA self-sufficiency test requires that rental income from 3- and 4-unit properties fully covers the mortgage payment to qualify for FHA financing.
• Projected rental income is calculated using a vacancy factor and must match or exceed total monthly costs.
• Higher interest rates make passing the test more difficult; carefully assess rental potential.
• If a property doesn’t pass, consider a larger down payment, lower rate, or alternative loan type.
• Run the self-sufficiency test with a lender before making an offer to avoid potential financial setbacks.

What Is the FHA Self-Sufficiency Test?

The FHA self-sufficiency test is a newer guideline that determines whether a property’s rental income can cover its full payment.

A triplex or four-plex is not eligible for FHA financing unless its rental income potential exceeds the payment. The rule does not apply to duplexes.

For example, you can use an FHA loan on a 4-unit home with $4,000 in eligible rental income (after the vacancy factor is applied) only if the payment is less than or equal to $4,000.

That being said, there are some “gotchas,” and the formula isn’t as simple as stated above, so let’s dive into details.

Related: Fannie Mae Rolls Out 5% Down Multifamily Lending

Calculating FHA Self-Sufficiency Rental Income

To FHA, a property's full rental income potential is not eligible rental income for the self-sufficiency test.

You must use an FHA-approved appraiser’s rent estimate minus a vacancy factor.

The vacancy factor is the greater of:

• The appraiser’s vacancy factor on the appraisal
• 25%

If the appraiser says the area’s typical vacancy is 20%, use the standard 25% factor since that is higher.

Calculating the PITIA Payment

Once you have the eligible rental income, it must be equal to or greater than the full PITIA payment.

FHA regards the full payment as:

• Principal: Loan principal due each month
• Interest: Interest due each month
• Taxes
• Insurance:
  • Mortgage insurance: FHA mortgage insurance is typically, 0.55% of the loan balance divided by 12
  • Homeowner’s insurance
• Association (HOA) Dues

Self-Sufficiency Test Formula

Rent from all units X 75%

Must be greater or equal to:

The Full Housing Payment, Including Principal, Interest, Mortgage Insurance, Taxes, Homeowners Insurance and HOA Dues

FHA Self-Sufficiency Test Example

Here's an example: Imagine you’re buying a 4-unit home with an FHA loan and want to see if it passes the test.

Result: $3,000 ≥ $2,900, so the home is eligible for FHA financing.

What if the Home Doesn’t Pass the Test?

If the home doesn’t pass, you still have options.

Make a bigger down payment: This could lower the payment to the point where it does pass.

Lower your rate: This could also reduce the payment enough to reach eligibility

Conventional loan: In November 2023, Fannie Mae introduced a 5% down multifamily loan. The former down payment level was 15%- 25%. The loan does not require a self-sufficiency test.

VA loan: If you have military experience, try a VA loan. You can buy a home up to 4 units with zero down payment.

Do the Test Before Making an Offer

Before you make an offer on 3- or 4-unit home, consult your lender. The loan officer can run the test with decent accuracy before you commit to a home.

Avoid the situation where you lose your earnest money because the property can’t pass the test.

Self-Sufficiency Test Is Now Harder To Pass

Rates have risen dramatically since mid-2022, making it more difficult to pass the test.

For example, a full payment might be $2,000 at a 3% interest rate but $3,500 at a 7.5% interest rate.

If market rents are $3,000, the property would pass at the lower rate but not at 7.5%.

This is why it’s more important than ever to make sure a property “pencils out” according to FHA guidelines.

Why Does FHA Require the Self-Sufficiency Test?

It’s hard to speak for HUD, but it’s likely the agency saw a pattern of inexperienced landlords buying triplexes and quadplexes at any price and then getting behind on payments.

So, HUD implemented a fairly conservative guideline to safeguard itself and the buyer. With the rule in place, a buyer could temporarily lose a renter and still potentially make the payment.

And, the idea of buying a duplex, triplex, or four-plex with an FHA loan has become so popular in recent years that perhaps HUD wanted to make sure buyers weren’t “house hacking” too aggressively.

Whatever the reason, it appears the rule is here to stay. In a way, it’s a good thing. The test can tell you whether the home is likely to cash flow or drain you each month.

How To Get Acceptable Rent Estimates

Part of the self-sufficiency test requires a market rent estimate from an FHA-approved appraiser.

This is not something you order.

The lender will request an additional report from the appraiser in addition to the standard appraisal report. The rent estimate will require an additional fee.

This begs the question: What if you estimate a certain market rent, and then the appraiser low-balls the rent estimates?

It’s possible. Do your own research. Your lender may have resources that can estimate market rent fairly accurately, such as a Realtor, automated software, or by looking at comparable rental properties in the area.

If your estimate cuts it close, you might consider not making an offer. Just a slight reduction in rent or a high vacancy factor from the appraiser, and the property may fail the self-sufficiency test.

Will a Multifamily Fixer-Upper Pass the Test?

FHA allows you to fix up a 2-4 unit residence with its multifamily 203k renovation program. However, it's best used on a duplex. For 3-4 units, you must use the existing lower rents for the self-sufficiency test, not the higher future rents after the renovation.

There are few, if any, properties that will be self-sufficient at the lower current rent level.

The FHA Triplex and Quadplex Test: The New Reality

Buying a multifamily property is still a great idea and can launch your real estate investing goals. But now, it’s a bit harder with FHA.

If you find the right property, though, your plan can still work.