FHA loans · HUD Handbook 4000.1FHA duplex, triplex or fourplex: rental income and the self-sufficiency test

FHA insures loans on homes with up to four units, and rent from the property can help the buyer qualify. Under HUD Handbook 4000.1, rental income from the subject property can count when it is a one-unit home with an accessory dwelling unit (ADU), a two- to four-unit home, or an acceptable investment property; income from commercial space never counts. Without a rental history since the last tax filing, the lender uses 75% of the lesser of the appraiser's fair market rent or the rent in the lease – documented for two to four units with the small residential income property appraisal (Fannie Mae Form 1025) and any prospective leases. With a rental history, it uses the last two years of tax returns with Schedule E. Net rental income is added to the borrower's gross income; it can't be used to reduce the mortgage payment. For a one-unit home with an ADU, ADU rent can be no more than 30% of the total monthly effective income. Three- and four-unit properties must also pass a self-sufficiency test: the monthly principal, interest, taxes and insurance (PITI) divided by the net self-sufficiency rental income can't exceed 100%. Net self-sufficiency rent is the appraiser's fair market rent for all units – including the one the borrower will live in – minus the greater of the appraiser's vacancy and maintenance estimate or 25% of that rent. For a home with an ADU or two to four units, the borrower also signs form HUD-92561, the Borrower's Contract with Respect to Hotel and Transient Use of Property; FHA-financed investment properties may not be rented for periods of less than 30 days.