3-4 Unit Properties

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

It seems like the bulk of cases that we underwrite everyday are single unit properties. Every now and then we see a two-unit property, which are handled very similarly to our single unit properties so there really is no earth shattering news to share there. However, when we pick up that 3-4 unit property a lot of underwriters want to proceed as if we are handling a single family unit and I want to tell everyone right now, please don’t. There are different requirements where the 3-4 unit properties are concerned, particularly with FHA, and not adhering to the guidelines will result in an uninsurable loan not to mention a case that is probably not saleable on the secondary market.

Purchase and refinance transactions where 3-4 unit properties are concerned are handled similarly from a credit documentation standpoint. Paystubs, W-2 wage statement and bank statements are still required and the case is underwritten from a credit standpoint in the same manner as any other transaction type.

There are other areas however where there are significant guideline differences that must be addressed by the underwriter in order to make sure that the case is insurable under FHA guidelines. There is a deviation under standard guidelines where assets are concerned, more particularly the fact that you must verify 3 months PITI in reserves after closing using standard documentation guidelines so you need to verify sufficient funds for closing as well as required reserves and gift funds are no allowed. This is also required on refinance transactions and cash out from loan proceeds can not be considered when determining these reserves.

Next from a disclosure standpoint, you need to make sure that the borrower has executed the Hotel and Transient Use disclosure on all 2-4 unit properties. This disclosure is provided within your loan origination system and must be provided and executed by the borrower at time of application.

Finally and most importantly is your loan amount calculation where the 3-4 unit properties are concerned. This is a big and really could affect the maximum mortgage the borrower is allowed so make sure you calculate the loan amount correctly and check your Conditional Commitment correctly as well. FHA guidelines where 3-4 unit properties are concerned state that regardless of occupancy, the property must be self sufficient and in this they mean the maximum mortgage is limited so that the ratio of the monthly mortgage payment divided by the monthly net rental income does not exceed 100%. You must further consider the following:

1. The monthly payment is the PITI including mortgage insurance plus any HOA fees computed at the note rate.

2. Net rental income is the appraiser’s estimate of fair market rent from all units including the unit chosen by the borrower for occupancy less the appraisers estimate for vacancies or the vacancy factor as determined by the jurisdictional HOC, which ever is greater. I have always used 25% and it seems to work fine. Keep in mind that this calculation is used only to determine the maximum loan amount and the borrower must still qualify based on income and ratio guidelines. The projected rent may only be considered as gross income for qualifying purposes and may not be used to offset the monthly mortgage payment.

What this means is that from an underwriting standpoint you are going to be backing into your loan amount based on the borrowers monthly payment regardless of appraised value to determine that the property can carry itself. In other words if the borrowers total monthly net rental income from all units is equal to $2000.00 your total monthly PITI can not exceed this amount and your loan amount will have to be adjusted accordingly in order to achieve this regardless of what loan amount the borrower may actually qualify for. You are going to need to condition for a Comparable rent schedule and Operating Income statement in order to complete your calculations.

In closing I will say be careful with your calculations, simply miscalculating property taxes can get you into trouble (I am speaking from experience). As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.