Sonoma County Mortgages

All financing provided by New American Funding

(707) 217-4000 | Prequalify Now
  • Home
  • Purchase
    • How Much Down Payment To Buy A Home?
    • How Much Income You Need To Buy A Home
    • How Much Should I Save For Buying A Home?
      • How Rates Affect Payment
    • No PMI Mortgages
    • FHA Loans
    • Sonoma County Disaster Loans
    • Jumbo Loans
  • Refinance
    • Mortgage Rates
    • Does It Make Sense To Refinance?
      • Get Your Refi Paperwork In Order
    • How To Pay Off Your Loan Faster
    • How To Remove PMI
    • How Lenders Price & Quote Loans
  • Loan Programs
  • Payment Calculator
    • Mortgage Affordability Calculator
  • Blog
  • Videos
  • Scott Sheldon
    • Scott Sheldon
      Senior Loan Officer
      NMLS ID# 287389
      Direct: 707 217-4000
      Scott.Sheldon@nafinc.com
      Specializing in Residential Home Loans for Primary Residences, Second Homes, Investment Properties, Single Family Homes, Condos, PUDs, 1-4 Units.

Get Your Latest Rate Quote Now!

Carrying A Rental Property May Hurt Your Mortgage Chances

May 25, 2014 by Scott Sheldon

Share on Facebook
Facebook
Tweet about this on Twitter
Twitter
Share on LinkedIn
Linkedin
Pin on Pinterest
Pinterest
Email this to someone
email
Print this page
Print

Do you own rental property? If yes, and you’re looking to borrow money with a new mortgage, your gain or loss identified by your tax returns may help or hinder your chances of procuring favorable credit. Lenders can use up to 75% of the rents generated, however, if there is a history of rental losses, those losses may limit borrowing power. What to pay attention to if you have a mortgaged rental property…

Know Your Schedule E

The schedule E of your Form 1040 is the area of your personal income tax return where you report rental property. If at the end of the calendar year, you have a net loss on your tax return, you could face a tough time qualifying for a mortgage because the loss is counted as a liability much like a minimum payment is on a car loan, credit card or other consumer debt.

Lenders will usually average a two year history for each rental property owned. An averaged gain or loss from the Schedule E will determine if you cut the mustard for qualifying.

How The Math Pencils

For each rental property, not as simple as using gross income to offset a mortgage payment (comprised of lender payment + taxes +insurance). The other factors that come into play include for carrying rental property maintenance expenses as well as depreciation, which by the way is required on rental properties. This is especially important if a previous home was a primary residence and has been converted into a rental property. The depreciation schedule will specifically delineate at what point in time the property became a rental which is crucial for the lender to consider income generated.

Here is the special formula lenders use to determine if your rental property is a liability against your income

Using the annualized figures from the Schedule E:

The Calculation →gross rents + taxes+ plus mortgage interest + insurance+ depreciation+ HOA (homeowner’s association if applicable) -total expenses divided by 12 = net gain or loss

Knowing the lender into turning how you qualify will look at the most recent last 24 months, this formula will be performed for each rental property you have whether or not there is a mortgage on that particular property.

*Mortgage Tip: if any rental property is free and clear of any mortgages, there is almost always a gain -resulting in more useable income for the loan.

Where Rental Numbers Affect The Mortgage Amount You May Qualify For

The debt to income ratio is an anchor component in the making of a favorable credit disposition, i.e. a loan approval. Essentially, the debt to income is the amount of your gross monthly income that goes to a total mortgage payment including taxes and insurance plus any minimum payment obligations you may have on other debts like credit cards, car loans, personal loans, student loans, child support among others. The larger percentage of liabilities against your income the less borrowing ability you have as a mortgage applicant.

Consider this scenario, Borrower A with $10kper month in income, with a 500 per month car payment and two rental properties showing equal breakeven.

Consider the same scenario with Borrower B having $10k per month loss per property per year.

Each borrower is trying to qualify for a 450,000 mortgage assuming a 30 year fixed rate at 4.375%. Assuming taxes and insurance are $600 per month, principal and interest payment, is $2246.78 per month, so total payment is $2,846.

Borrower A

$10,000 monthly income x .45% as debt ratio (common ratio number lenders use to qualify borrowers) equals $4,500 per month, the maximum threshold for the total liability payments in relationship to the income. $4,500 – $500 car payment is a $4k mortgage payment, this person would easily qualify for the $2,846 or mortgage payment. This represents a healthy debt ratio of 33%.

Borrower B

$10,000 monthly income x .45% equals $4,500 less than $500 car payment is a $4k in total liabilities this consumer can take. $4k, less $2k in rental losses, less $2,846 per month as the target mortgage payment, leaving the borrower negative $846 per month, resulting in a 53% debt to ratio to income, causing a would be lender to deny such transaction or reduce the loan amount.

Rental Property Finance Tips

  • 75% of gross rents are used for income calculating as lender must account for vacancies
  • More than four financed properties? Some lenders may not allow, others may charge a pricing premium to go up to 10 finance properties
  • The rule of averaging the rents, is reduced if one of the rentals is the subject property being refinanced for payment reduction
  • Lender will require a copy of the lease agreement for each rental
  • If there is a new rental agreement in place with higher rent than what the tax returns support, lender will use the tax returns for rental income as that is the only sufficient supporting documentation for income history.

Looking into a mortgage possibility? Begin by getting a free mortgage rate quote today!

 

 

 

 

Related Mortgage Advice from Scott Sheldon

  • what to know about a mortgage 4506t
    How to evaluate buying a rental property

    Buying a rental property can be very lucrative and sound financial vestment. Here's how to…

  • number 1 mistake when getting a mortgage
    What to do if you need last year's income tax returns to get a mortgage

    How's your income? This is the first of many questions a banker is going to…

  • Loophole To Show More Income When Buying A Home

    Buying can be considered simplistic, in a broad sense, income is used to offset a…

  • Does My Loan Type Hurt My Credit Score?

    Future favorable financing deals, low rates and preferred credit offerings all will be available depending…

Filed Under: Loan Qualifying Tagged With: buying a house, home loan refinance, rental, Santa Rosa mortgage

Latest Video Tips

sonomacountymortgage

We are looking for an experienced, energetic, fun ...

Feb 6

Open
We are looking for an experienced, energetic, fun and dynamic individual to join our Santa Rosa Branch for New American Funding.

This person would be have specific recent mortgage experience, know the loan business including guidelines and be willing to go the explore mile. If you know someone like that please feel free to message me.

@nafmidpacificregion
@stylemyheart @newamericanfunding #talent #hiring #fun #talent #looking #team #crew #building #family #santarosa #sonomacounty

We are looking for an experienced, energetic, fun and dynamic individual to join our Santa Rosa Branch for New American Funding.

This person would be have specific recent mortgage experience, know the loan business including guidelines and be willing to go the explore mile. If you know someone like that please feel free to message me.

@nafmidpacificregion
@stylemyheart @newamericanfunding #talent #hiring #fun #talent #looking #team #crew #building #family #santarosa #sonomacounty
...

sonomacountymortgage

Every family we meet with gets this super handy ...

Jan 30

Open
Every family we meet with gets this super handy packet. We like families to have something tangible when it comes to financing a home. You won't find this type of service with a Rock Loan company or an internet lender...🤔 @nafmidpacificregion @nikki___perfectly_imperfect83_ @_gorjessxo #family #team #value #rates #mortgage #goals #homes #realestate

Every family we meet with gets this super handy packet. We like families to have something tangible when it comes to financing a home. You won't find this type of service with a Rock Loan company or an internet lender...🤔 @nafmidpacificregion @nikki___perfectly_imperfect83_ @_gorjessxo #family #team #value #rates #mortgage #goals #homes #realestate ...

sonomacountymortgage

My little sweet pea loved the award dad earned for...

Jan 18

Open
My little sweet pea loved the award dad earned for having a record year. #families 
#mortgage #kids #family #team #goals #success #year #2019 
@nikki___perfectly_imperfect83_ @_gorjessxo @nafmidpacificregion @nafsantarosa @tinalsheldon

My little sweet pea loved the award dad earned for having a record year. #families
#mortgage #kids #family #team #goals #success #year #2019
@nikki___perfectly_imperfect83_ @_gorjessxo @nafmidpacificregion @nafsantarosa @tinalsheldon
...

Popular Posts

Why your income is your lifeline to finance a home

Why your income is your lifeline to finance a home

Filed Under: Credit Score Questions and Answers, Economic News, First Time Home Buyers, Jumbo Loans, Loan Programs, Loan Qualifying, Mortgage Shopping, Mortgage Tips & Advice, Popular

2020 Conforming Loan Limits Increaase

New loan limits for 2020 makes getting a mortgage easier

Filed Under: Economic News, First Time Home Buyers, Interest Rates, Mortgage Shopping, Mortgage Tips & Advice, Popular, Pre-Approval

Why the purchase price in a real estate transaction should not be the single most important factor

Why the purchase price should not be the single most important factor

Filed Under: Credit Score Info, Economic News, First Time Home Buyers, Interest Rates, Invesment Properties/Second Homes, Jumbo Loans, Loan Programs, Loan Qualifying, Mortgage Shopping, Mortgage Tips & Advice

How to avoid getting a jumbo loan due to Coronavirus

Here are 2 mortgage process problems you will want to avoid

Filed Under: Credit Score Questions and Answers, Interest Rates, Loan Programs, Loan Qualifying, Mortgage Shopping, Mortgage Tips & Advice, Popular, Pre-Approval, Purchase Mortgage Loans Questions and Answers

Self Employed Borrowers

Here is a legit non-traditional income program for self-employed mortgage borrowers

Filed Under: Credit Score Info, Economic News, First Time Home Buyers, Interest Rates, Loan Programs, Loan Qualifying, Mortgage Shopping, Mortgage Tips & Advice

How to use seller carry financing to purchase a house with less cash down

Should you buy & build or buy a single family home?

Filed Under: First Time Home Buyers, Interest Rates, Loan Programs, Loan Qualifying, Mortgage Shopping, Mortgage Tips & Advice, Pre-Approval

SCM on Zillow

Zillow Reviews for Scott Sheldon, New American Funding

SCM on Facebook

SonomaCountyMortgages.com

Location & Contact

Scott Sheldon, Senior Loan Officer
NMLS ID# 287389
1450 Neotomas Ave Suite 115
Santa Rosa, CA 95405
1-707-217-4000
Email Us!

Copyright 2021 SonomaCountyMortgages.com · About Us · Sonoma County Loans · Privacy Policy · Terms Of Use · Legal · Site Map

NMLS Consumer Access © New American Funding. All rights Reserved. NMLS ID#6606.
Corporate Office 14511 Myford Road, Suite 100, Tustin, CA 92780. We at New American Funding take great pride in our customer service and make it our number one priority. We encourage you to contact us for complaint resolution or any post-closing questions you may have regarding the servicing of your loan. We strive to have your experience with New American Funding a stellar one. In the rare case that our service did not meet your expectations, please call our customer care hotline at 1-800- 450-2010, ext. 7100 or you may contact us by email customerservice@nafinc.com. Please leave a detailed message and we will follow up with you no later than the end of the next business day. If you are using a screen reader or other auxiliary aid and are having problems using this website, please call 800-450-2010 Ext. 7100 for assistance.

State Licensing | Privacy | Terms of Use | Electronic Consent Agreement

Connect With Scott In Your Inbox

Looking for a home? Real estate insider? Get connected with Senior Loan Officer Scott Sheldon. Scott stays updated on the latest in the mortgage industry, so you can stay updated with him!