USING RENTAL INCOME TO QUALIFY FOR A MORTGAGE

One of the key factors in your mortgage approval while buying a home is your debt-to-income ratio (DTI). Aside from your job, there are other sources of income that could impact your DTI. One that you may not have considered yet is the potential for rental income from property you already own, or even from the home you are buying. Is that even possible? Yes! There are a few different scenarios where this could work for you.

 

The answers to these questions may vary depending on what kind of financing you use. So, we’ll focus on conventional financing.

The home I’m buying is an investment property. Can I use rental income to offset the mortgage payment?

Purchasing a home specifically to rent out is a common scenario. How is the rental income calculated, and how much of it can be used toward your DTI?

Your mortgage advisor will order an appraisal of the home, including an appraiser’s opinion of market rent. We will then use 75% of the appraiser’s opinion of rent toward the qualifying income for your new property.

For example, if the appraiser’s opinion of market rent for the home is $2,000 per month, your lender would use $1,500 per month toward your qualifying income. But why not use the full $2,000? The remaining 25% that is not being used is to account for periods of vacancy and the costs of maintenance on the home.

The home I’m buying is two or more units. I’ll be renting out the unit(s) that I’m not living in. Can I use the rental income from the other unit(s)?

This is another common scenario. You’ll be occupying a portion of the dwelling yourself, so the loan is treated as an “owner-occupied” transaction. But you can still use potential rental income toward your qualifying income.

Your mortgage advisor will order an appraisal, and you can count 75% of the appraiser’s opinion of market rent toward your qualifying income, for the unit(s) you will not be occupying yourself. The appraisal will be specifically for a 2-4 unit property and will break out the rental value per unit, so you won’t have to get a mathematics degree to figure out how much rental income can be used.

The home I’m interested in buying for myself has a small additional living space; can I use the rental income from that toward qualifying?

Accessory Dwelling Units (ADU), also known as “mother-in-law apartments,” “studio above the garage,” “basement apartments,” “granny flats,” and many other terms, are increasingly common. These are a secondary smaller dwelling adjacent to the main home on one lot.

It’s common to advertise the additional unit as a source of additional revenue for someone to rent out while they live in the main home. While this may be possible (check with the city for local zoning restrictions), potential rental payments from an ADU cannot be used as a source of rental income to help you qualify for a larger home loan.

 

I’m buying a new home to use as my primary residence, and I plan on converting my current residence into a rental— can I use the rental income from my current residence toward qualifying?

Yes, you can! Your mortgage advisor will need you to provide a copy of an executed lease agreement and the security deposit check or first month’s rent check. In some cases, you will be able to use 75% of the lease amount toward your qualifying income.

I own an investment property already— can I use the rental income from that property toward qualifying for a home loan?

Your mortgage advisor will ask you for your most recent tax returns to use in calculating how much rental income we can use from that property. This is not a set percentage, and won’t be based on a current lease agreement. So, you will need to work directly with your mortgage advisor to find out how much money can be used toward qualifying in your specific scenario.

I own an investment property that I purchased in the middle of last year. My tax returns don’t show an accurate reflection of the income I would’ve made if I’d owned the full year. Is that going to impact how much rental income can be used toward qualifying for a home loan?

If your rental property was acquired during or after the most recent tax filing year or was out of service for an extended period of time, it is possible to use more income than what is reported on your tax returns.

Work directly with your mortgage advisor to explain your specific scenario. We can help you determine how much income can be used toward qualifying. You should prepare to provide documentation, such as a settlement statement to prove when the home was acquired, a current lease agreement to show what it’s being rented for, and/or documentation to explain why the rental property was out of service for a specific amount of time.

These are just a few of the questions we have seen about rental income and qualifying for a home loan. Our experienced team of Home Loan Experts are ready to answer any additional questions you may have. 520-495-0222.

Benefits of a VA Loan

Did you know that if you are a Veteran, you can qualify for a VA Loan? A VA Loan is a mortgage loan guaranteed by the U.S. Department of Veterans Affairs and was created to make housing affordable for eligible U.S. veterans and members of the military.

VA home loans are available to veterans, reservists, active-duty military personnel, and surviving spouses of veterans with 100% entitlement. Eligible veterans may be able to buy a home with no down payment, refinance up to 100% of the home’s value and pay no private mortgage insurance.

These loans carry a number of benefits (such as no down payment) that make them far more appealing than conventional loans in most cases for those who qualify.

Benefits of a VA Loan

The biggest benefit of a VA loan, for many borrowers, is that there is no need for a down payment. There aren’t many loan types that don’t require a down payment, and VA is one of them. There is no need to pay Private Mortgage Insurance (PMI) or arrange for a “piggyback” mortgage to cover your down payment.

Another significant benefit of a VA home loan is the competitive interest rate. Many times with a lower down payment, the interest rate will increase. But VA loans don’t have that problem!

What Can You Do With a VA Loan?

  • Specifically, a VA home loan can help veterans:
  • Buy a home or residential condominium
  • Build a home
  • Repair, alter or improve a home
  • Refinance an existing home loan
  • Buy and improve a manufactured home lot
  • Add energy-efficient improvements to a home
  • Purchase and improve a home simultaneously with energy-efficient improvements
  • Refinance an existing VA loan to reduce the interest rate

VA Loan Limits for 2019

If you want to purchase a home, condominium or manufactured home, the VA can guarantee up to the conforming loan limit of the total loan – with additional benefits such as no down payment and no private mortgage insurance (PMI). Keep in mind, your VA loan may have a funding fee depending on which benefits you qualify for.

VA Refi

If you are considering refinancing an existing loan, VA offers you two options. You can either refinance to reduce your current interest rate. This is also known as a “streamline loan” or “Interest Rate Reduction Refinancing Loan (IRRRL).”

Veterans also have the option to take equity out (a “cash-out” loan). You can obtain a VA cash-out loan for up to 100 percent of your home’s value.

VA Jumbo 

Veterans can use a Jumbo VA loan to purchase or refinance when the loan amount exceeds the conventional loan limits. Jumbo VA loans require a down payment. The amount of the down payment is determined using a calculation that factors in the county loan limits for the area the home is in, and the portion of the amount exceeding that loan limit which the VA will guarantee.

Our expert mortgage advisors can explain the details on how much of a down payment would be based on your specific scenario. Typically, the amount of down payment required on a VA Jumbo loan will be significantly lower than what’s required on a conventional jumbo loan. VA Jumbo loans also do not require mortgage insurance, regardless of the down payment amount, whereas conventional loans with down payments less than 20% always require mortgage insurance.

Do You Qualify?

Reach out to us on The Polder Group at Summit Funding. We are here to help.