4. Transactions Involving Three and Four Unit Properties

Introduction

This topic contains information on transactions involving three- and four-unit properties, including

•	three and four unit property mortgage limit

•	what is included in the monthly payment calculation for three and four unit properties

•	net rental income calculation for three and four unit properties, and

•	three and four unit property mortgage reserves.

Change Date

May 10, 2009

4155.1 2.B.4.a Three and Four Unit Property Mortgage Limit

The maximum mortgage for three and four unit properties is limited, so that the ratio of the monthly mortgage payment, divided by the monthly net rental income does not exceed 100 percent, regardless of the occupancy status.

Note: The calculations described in the remainder of this topic are in addition to the calculations found in HUD 4155.1 2.A.

4155.1 2.B.4.b What Is Included in the Monthly Payment Calculation for Three and Four Unit Properties

The monthly mortgage payment calculation for three and four unit properties includes the following:

•

principal

•

interest

•

taxes

•	insurance (Principle, Interest, Taxes, and Insurance - PITI), including mortgage insurance, and

•	Homeowner Association Dues computed at the note rate, if applicable.

Reference: For more information on the maximum mortgage amounts, see

•	HUD 4155.1 2.A.1, and

•	HUD 4155.1 2.A.2.

4155.1 2.B.4.c Net Rental Income Calculation for Three and Four Unit Properties

Net rental income for three and four unit property is calculated using the following formula:

•	the appraiser's estimate of fair market rent from all units, including the unit the borrower chooses for occupancy, and

•	minus the greater of the
	–	appraiser's estimate for vacancies, or
	–	vacancy factor used by the jurisdictional HOC.

This net rental income calculation is used to determine the maximum loan amount. Borrowers must still qualify for the mortgage based on

•

income

•

credit

•	cash to close, and

•	projected rents received from remaining units.

Projected rent may only be considered gross income for qualifying purposes.

It cannot be used to offset the monthly mortgage payment.

4155.1 2.B.4.d Three and Four Unit Property Mortgage Reserves

For three- and four-unit properties, the borrower must have personal reserves equivalent to three months' PITI after closing on purchase transactions.

The TOTAL Scorecard Accept Recommendation allows for reserve funds after closing to have been gifted.

Reference: For information on mortgage reserves, see

•	HUD 4155.1 4.E.5.d, and

•	HUD 4155.1 4.F.3.b.