Can You Buy a Three- or Four-Family With an FHA Loan? The Self-Sufficiency Test
FHA allows owner-occupants to buy up to four units with a low down payment, but three- and four-family homes must pass the self-sufficiency test. How it works and why it rules out many Greater Boston deals.
Yes, an owner-occupant can buy a three- or four-family with an FHA loan and a low down payment. But FHA adds a hurdle for three- and four-unit properties: the self-sufficiency test. In simple terms, the property's expected rents (after a vacancy factor) have to cover the full monthly mortgage payment. In much of Greater Boston, prices are high enough that many three-families don't pass, so check the math before you fall in love with a building.
How does the self-sufficiency test work?
The lender takes the appraiser's estimate of market rent for all units, including the one you'll live in, subtracts a vacancy factor (FHA uses 75% of rent, or the appraiser's figure), and compares the result with the full payment: principal, interest, taxes, insurance and mortgage insurance. If the adjusted rent is lower than the payment, the property doesn't qualify.
Why do so many properties fail?
Higher prices mean bigger payments, and FHA's mortgage insurance adds to them. Rents may be strong, but after the vacancy factor they often fall short. Two-families don't have this test, which is one reason they're so popular with first-time buyers.
What can you do if a property fails?
- Put more money down to lower the payment.
- Look at a two-family instead.
- Use a conventional owner-occupied loan, which has different rules.
- Look at other programs. Some state programs allow owner-occupied multifamily. See first-time buyer programs.
Questions people actually ask.
Does the test count my own unit's rent?
Yes. All units are counted at market rent, even the one you'll live in.
Does a two-family need to pass this test?
No. The self-sufficiency test applies to three- and four-unit properties.
Who calculates it?
Your lender, based on the appraisal. Ask for a rough estimate before you make an offer.
This article is general information about Massachusetts real estate, not legal, tax, or financial advice. Every property and transaction is different. For advice on your situation, talk with me and, where appropriate, an attorney, lender, or tax professional.