How to use rental income to qualify for a mortgage
Rental property is a great way to have additional streams of income and create a financial nest egg for you and your family. If you’re mortgaging a property with rental income here are some things you should be aware of when it comes time to qualifying for a mortgage…
If you’re buying a property for the first time you can use 75% of the fair market rents to qualify to offset the mortgage payment if you’re using 20% down. You need at least a 680-credit score in order to have reasonable rates and terms. Remember when financing an investment property, it’s always going to cost more than a primary home. Rental property mortgages approximately are about 1% higher than current Fannie Mae Freddie Mac primary home mortgage rates.
If you’re refinancing a rental property you already own the rents from that property will benefit you from a qualifying perspective. It must be the financing subject property that you’re financing though for the math to work in your favor. Let’s say you have other rental property that you’ve purchased a couple of years ago identified on your schedule E of your federal income tax return, if those rental properties show losses it’s likely that they will hurt your chances for qualifying not an absolute, but possible.
The lender takes such things as tax and other costs for example which drives the net income on your schedule e rents down. Additionally, Fannie Mae and Freddie Mac have a special formula they use to qualify you with carrying rental property. In other words, just because for example that you might be running out your property for $3,000 a month, but you have a net loss of $500 a month the lender still must use the schedule E for qualifying.
As mentioned above if you buy a property for investment purposes you can use 75% of the current market rents or of the proposed market rents supported by the market. This would be especially beneficial if you have a mortgage on your primary home, so you don’t need income to offset two different mortgages. Let’s say you bought a rental property at the end of 2018. Here’s where things can get dicey. You bought your rental property at the end of 2018 and you have not filed your 2018 tax return. It’s not due until October of the following year. That’s your diamond in the rough the Golden Goose of lending.
In this example since you haven’t filed your 2018 tax return, yet the lender can use 75% of the current market rents or if the property is not rented, they can use the proposed rents from the appraiser. The lender using 75% of current market rents is permitted is this example since return is not due till October. So long as your mortgage closes by Oct 15th which is the tax deadline, lender is not required to use the tax return because you bought the property at the end of 2018.
This could allow you to purchase more home and it’s not just for 2018 this is for any year. As long as you buy the property and as long as you don’t have your tax return completed with that property identified on your schedule E if you’re not legally required to base on the tax return filing dates you’re in a good position to use the rents which will lower your debt to income ratio allowing you to borrow more or qualify for more house whether you’re purchasing or refinancing.
Let’s say here’s another example it must make sense so if your scenario is anything above that’s a yield at unique if you bought that property and you did file your 2018 tax return and you have a loss but maybe you’re doing work the property. If you bought the rental property a couple of years ago sunk a bunch of work into it and you can produce the receipts to show that you’ve done work to the property is reasonable you could use the fair market rents at 75% of rents to qualify ignoring the schedule e loss as long as you have a solid explanation, you can document the previous rent to the new rent, and you can produce all of the receipts showing the specific capital improvements that you made to the property. This is on a case-by-case basis and it may fly depending on the lender that you’re working with.
You’ll want to make sure that you fully have your file reviewed by the lender that you’re working with. If you don’t like their answer it might not be a bad idea to get a second or maybe even a third opinion. Some lenders will not allow this so be sure to check. If a lender has overly restrictive requirements that is an indicator that lender doesn’t have the type of credit policy that say a bigger lender would have in pushing the envelope further in your financial interests to give you every bit of income needed to help you qualify. Remember that when you’re trying to pick a lender that’s going to be helping you with your investment property financing needs.
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