A lender requires an appraisal to estimate the value of the property and rent for all the units combined. The lender takes this estimated rent and applies a vacancy factor to account for expenses. This is usually 15-25% of the total rent. The rent after this deduction must exceed the new mortgage.
For example, if a 3 unit complex has an estimated total rent of $3000/month from the appraisal, the lender will apply the vacancy factor and use a rent amount of $2250/month. This $2250 needs to be more than the estimated mortgage. This includes all taxes, insurance, mortgage insurance, and any community fees. Unfortunately, if the mortgage was estimated to be $2500/month, then FHA won’t close on this deal.
We run these estimates upfront for our borrowers while they’re out shopping for properties to avoid any issues. When rates and prices are high, this FHA self sufficiency rule can be a hindrance on someone’s ability to use FHA to buy a 3 or 4 unit property. Thankfully, duplexes are excluded from this rule and conventional financing has some low down payment options.