FHA Financial Analysis & Planning 3 — Questions and Answers
Question 1: For FHA appraisal purposes, which factor most directly affects the selection of an appropriate capitalization rate for a single-family rental property?
- Market risk and comparable sales data (Correct answer)
- The borrower's credit score
- The loan-to-value ratio
- The property's assessed value
Correct answer: Market risk and comparable sales data
Cap rates are market-derived from comparable sales and reflect the risk and return expectations of typical investors in that market.
Question 2: An appraiser is reconciling the income approach and sales comparison approach for a duplex. The income approach indicates $310,000 and the sales comparison indicates $325,000. Under FHA guidelines, what should guide the final reconciliation?
- The approach best supported by market data and investor behavior (Correct answer)
- Always the lower value for safety
- Always the sales comparison approach
- An exact average of the two values
Correct answer: The approach best supported by market data and investor behavior
FHA requires the appraiser to reconcile approaches based on quality of data and how market participants actually value the property.
Question 3: Which expense is classified as a capital expenditure (CapEx) and should NOT be included in annual operating expenses when developing NOI for an FHA appraisal?
- Roof replacement costing $18,000 (Correct answer)
- Annual landscaping contract of $1,200
- Monthly pest control at $85
- Annual fire insurance premium of $2,400
Correct answer: Roof replacement costing $18,000
Roof replacement is a capital expenditure spread over its useful life, not an annual operating expense used to calculate NOI.
Question 4: A FHA appraiser calculates a stabilized vacancy rate by analyzing local market conditions. Which data source is most appropriate for this analysis?
- Local rental market surveys and comparable vacancy data (Correct answer)
- The owner's historical personal records only
- National average vacancy statistics
- The subject property's prior-year rent rolls alone
Correct answer: Local rental market surveys and comparable vacancy data
Market-derived vacancy rates from local surveys and comps are the most credible basis for stabilized vacancy analysis.
Question 5: In FHA appraisal of income properties, 'effective gross income' (EGI) is calculated as:
- Potential Gross Income minus vacancy and collection loss plus other income (Correct answer)
- Net Operating Income plus operating expenses
- Potential Gross Income minus all operating expenses
- Gross rent multiplied by the cap rate
Correct answer: Potential Gross Income minus vacancy and collection loss plus other income
EGI = PGI − Vacancy & Collection Loss + Other Income (e.g., parking, laundry).
Question 6: When appraising a 3-unit FHA property, the appraiser notes that one unit is owner-occupied. How should the income approach treat this unit?
- Estimate market rent for the owner-occupied unit as if it were rented (Correct answer)
- Exclude the owner-occupied unit from income analysis entirely
- Use zero income for the owner-occupied unit
- Double the rent of the remaining units to compensate
Correct answer: Estimate market rent for the owner-occupied unit as if it were rented
The income approach requires market rent to be estimated for all units, including owner-occupied, to reflect the property's full income potential.
Question 7: Which financial ratio measures the ability of a property's NOI to cover its annual debt service and is commonly reviewed in FHA multifamily underwriting?
- Debt Coverage Ratio (DCR) (Correct answer)
- Loan-to-Value Ratio (LTV)
- Break-Even Ratio (BER)
- Operating Expense Ratio (OER)
Correct answer: Debt Coverage Ratio (DCR)
The Debt Coverage Ratio (DCR = NOI ÷ Annual Debt Service) measures whether income sufficiently covers mortgage payments.
FHA Financial Analysis & Planning 3
For FHA appraisal purposes, which factor most directly affects the selection of an appropriate capitalization rate for a single-family rental property?