Rental income can be a double edged sword if you need it to qualify. Here’s what to know about your new rental future rental income when it comes time to getting a mortgage…
Some mortgage companies will give you the benefit of using fair market rents for income when buying a rental property. The type of financing is called non-owner occupied and it does cost more than primary home financing. Expect a rate twenty five to thirty five basis points higher than owner occupied and secondary home transactions.
Where it may get sticky
Let’s say you have a rental property that you had for the last few years. Your new rental agreement is higher than the rental income from previous years which are identified on your tax return.You cannot use this new income to qualify as there is no history of that income. Lenders will perform a rental property analysis taking into consideration depreciation, expenses, insurance, mortgage, HOA and interest paid to banks. The net income of this lender averaging is what is used to determine how your rental with hurt, help or have no affect on your ability to borrow.
Mortgage tip: know this- showing big losses on your Schedule E will limit your borrowing power. It does not automatically preclude you from qualifying, but it does count into your debt to income ratio. Your debt to income ratio is a benchmark factor lenders use to assess how much debt load you can carry against your income.
How rental income comes together for a mortgage
General lending rules with rental properties:
- Projected rents may used by most lenders as an offset against the mortgage payment at 75% gross market rents determined with an appraisal when buying a property.
- If you owned a rental property for the last 12 months, lender averages your expenses which may impact your income ratios and ultimately how much mortgage you can handle.
- If you bought a rental in the last year, but have not yet filed your return you can use 75% of the rents with a rental agreement bypassing the rental averaging lenders use.
How you report your expenses on your Schedule E will make all the difference in how you qualify with a lender. Even if a property is showing a loss you it still may make sense to borrow as keeping the property overtime might mean carry forward losses to offset against future taxable earnings. Alternatively, selling the property may net extra funds to purchase another property minimizing any rental losses in the process. **Please note always consult with a licensed tax professional regarding your unique situation.**
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