I receive a fair amount of questions from real estate investors, asking about rental income and how that is calculated in their overall income that will enable them to qualify for mortgage.
The amount of rental income that may be used and how it is calculated will depend on multiple factors – such as when the borrower obtained the rental property, when rents were collected, and what how many units there are with the subject property.
Underwriters are looking for the likelihood that the rental income will continue, as well as any potential losses too.
If your rental is producing a net loss, it will absolutely be factored into the debt-to-income ratios that are used for qualifying.
Here are some of the standard guidelines for determining rental income.
Calculating rental income when the property is being purchased
- If the property is leased, then copies of the current signed lease agreements may be required.
- If the property is not currently leased, then the lender may use “market rent” information provided by the appraiser.
- When there is no rental income for the subject property on the borrowers tax returns, the rental income will be reduced to 75% of the gross rental income provided on the lease.
Calculating rental income when the subject property is being refinanced
- Copies of the fully executed lease agreements must be provided (assuming the home is currently rented).
- If the borrower owned the property during the previous year, they will need to provide tax returns. The lender will use the information provided on Schedule E to determine the net rental income/loss.
- If the property was rented for a portion of the previous year, the lender will still need to provide a copy of the tax returns, including Schedule E. The borrower will also need to explain (and document) why the home was not rented for the full year. For example, was the home recently purchased or out of service to be renovated.
- Rental income will be averaged based on the months the home was in service the previous year.
- The lender may also rely on “market rent” data from the appraisal.
What if you’re converting your existing home into a rental to buy another home?
- The rental income may be used if you can provide:
- A fully executed lease agreement – and this lease may be month-to-month
- proof of security deposit from the tenant and first month’s rent (cancelled check); and
- a bank statement showing the deposited security and rent deposit.
- 75% of the verified rental income can be used to offset housing expenses
With that said, there are other options – outside of the standard conventional products for investors. Some enable borrowers to use only the expected rental income to qualify – without providing income or tax returns. Contact me for more information, as it would be my pleasure to help!
