FHA Rules for Multi-Unit Properties: The Uncensored Truth

The Federal Housing Administration was created to promote homeownership, not to fund real estate moguls. Therefore, you cannot use an FHA loan to purchase a multi-unit property if you do not intend to live there.

The 60-Day Move-In Rule

At least one Borrower must occupy the property as their Principal Residence within 60 days of signing the closing documents. The borrower must intend to continue occupying the property as their primary residence for at least one year.

The House Hacking Strategy: Because you only need to occupy one unit, you are free to rent out the remaining 1, 2, or 3 units to tenants. Once you have lived in the property for one year, FHA guidelines generally allow you to move out, rent your unit, and buy a new primary residence (though obtaining a second FHA loan carries specific restrictions).

One of the greatest benefits of the FHA multi-unit program is that you do not need to make enough money from your W-2 job to afford the entire mortgage on your own. FHA allows the Mortgagee to add the projected rental income from the non-owner-occupied units to your effective income.

The Appraisal Rent Schedule

You do not need active tenants or current leases to use rental income. Instead, the FHA Appraiser will complete a form called the Single Family Comparable Rent Schedule (Fannie Mae Form 1007 / Freddie Mac Form 1000). The appraiser will determine what the fair market rent is for the other units based on similar rentals in the area.

The 75% Vacancy Factor

FHA does not allow you to use 100% of the projected rent, as they assume there will be times when the units are vacant or require maintenance. We must apply a vacancy and maintenance factor of 25%.

• The Math: If the appraiser determines the other unit will rent for $2,000 per month, the Mortgagee will multiply that by 75%. We will add exactly $1,500 ($2,000 x .75) to your qualifying monthly income.

If you are buying a 2-unit property (duplex), this section does not apply to you. However, if you are purchasing a 3-unit or 4-unit property, you must pass the strictest rule in the FHA handbook: The Net Self-Sufficiency Rule.

What is Self-Sufficiency?

FHA requires that any 3-to-4 unit property must be completely self-sufficient. This means the rental income alone must be able to cover the entire mortgage payment—even while you are living in one of the units for free.

The Self-Sufficiency Calculation

The Mortgagee must calculate the Net Self-Sufficiency Rental Income by using the appraiser's estimate of fair market rent from ALL units, including the unit the Borrower will occupy.

• Step 1: Add up the total projected monthly rent for all 3 or 4 units.
• Step 2: Multiply that total by 75% (to account for the vacancy factor).
• Step 3: Compare that number to the proposed monthly mortgage payment (PITI: Principal, Interest, Taxes, and Insurance).

The Fatal Flaw: If the result of Step 2 is less than the monthly mortgage payment, the property fails the test and the loan is denied. No exceptions. This is why buying 3-4 unit properties in high-tax or high-insurance areas using FHA is incredibly difficult.