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.

SECOND HOME FOR COLLEGE STUDENTS

They grow up so fast. It seems like just yesterday they were learning how to crawl, and now your child is packing up for college. With all the overwhelming emotions you must be feeling, there’s no doubt you’re also feeling the sticker shock of paying for their education. From tuition and books to parking passes and meal plans, college is a pricey investment.

There are some costs that are just unavoidable, but there is one area of spending that could create long-term wealth for both you and your student. Have you considered buying a second home for your college student?

Before you panic at the thought of a second mortgage, let’s look at the long-term benefits of a second home, rather than paying for university housing.

Investment Strategy

When it comes to planning for your future (and your child’s) it never hurts to have a backup plan. By investing in a different market of real estate, outside of your primary residence, you have the potential to increase your investments. Owning a second home also opens up the options for your living situation after retirement.

Owning, rather than renting, a home will also allow the home to build equity. MyCollegeGuide recently said students at public universities can expect to pay an average of $8,887 each year for room and board, and those at private universities are likely to pay closer to $10,089 per year. Why not put this money toward a home that has the potential to keep making money, long after your student moves out?

Tax Benefits

As long as you use the property as a second home, and do not rent it out, you can deduct mortgage interest the same way you do on your primary residence. As a homeowner, you can deduct up to 100% of the interest you pay up to $750,000 of the total debt that is secured by both the primary home and the second home. (Note: $750,000 is the total debt between the two houses, not $750,000 each.)

When deciding on whether or not to rent out your property to another individual for the time you’re not using it, speak with a financial advisorCertain tax breaks will or will not apply, based on your specific situation.

Appreciation

College towns are perfect for property appreciation. Because new students will always be moving through, homes in the area will always be in high demand. Even after your college-aged kid moves out, you could consider renting it out to other students. Or, if you have multiple kids going to the same school, rent the property out during the years it’s being unused. (If you do this, be aware of how it will affect your taxes.)

Stability

Avoid the stress of finding a new living space each year by owning a home your child can live in for all four years of college. No move-in dates, security deposits, or storage fees.

Additional Tips

If you’re considering purchasing a second home, rather than paying sky-high prices for university housing, consider these additional tips: 

Remember all the expenses. Taking care of a home is an expensive task. From lawn care to appliance upkeep, you’ll need to factor in all of the costs of buying the home, besides just the mortgage.

Look in advance. Even if your kids are a few years away from picking a college, consider the benefits of different markets. Buying a home in one state versus another might be a deal-breaker. You’ll also need to be in good financial standing when you apply for a home loan. (Know your loan options.)

Understand scholarship requirements. If your child is awarded a scholarship through the university, living on-campus might be a requirement. Consider all the possibilities with your child in advance and stay on top of potential requirements. (Some universities will require freshman to also live on campus, no matter what.)

Help your child establish credit. If you decide to have your soon-to-be-student listed on the mortgage and deed, they will need to have some established credit before applying. Consider applying for a low-limit credit card in the student’s name or have a small car loan in their name to help with their credit rating.

Do you have more questions? Give our team of loan experts a call. 520-495-0222