What if we say that you have a good chance of getting approved for your mortgage if you have rental income? So why not take advantage of this? In this article we will try to take into account some important factors for qualifying for your mortgage using future rental income.
Investment Rental Income
- Debt service coverage will vary depending on the state you live in and the property you want to invest in. Experienced investors consider the following factors when investing in real estate:
- Cash flow.
- Hedge against inflation.
- Passive income.
- Property value appreciation
- Tax benefits.
Recommendations for using rental income to obtain a mortgage depends on the agency’s guidelines and the situation. The general requirements for documenting income depend on whether the transaction is a purchase or a refinance.
Criteria that must be met when applying for a mortgage
For the most part, whether your future rental income is taken into account when applying for a mortgage will depend on your ability to verify your income from. However, as all other sources of income, rental income must be properly documented and meet certain eligibility requirements as well. Here are some criteria you must be met:
- You have to prove your rental income will probably continue
- The property must be a two- to four-unit principal residence property in which the borrower occupies one of the units, or a one- to four-unit investment property
For instance, it`s possible to use rental income from a commercial property, in case if that property is not being financed.
- Income from the borrower’s principal residence ( no matter is it from a stand-alone property or from a particular unit in a multiunit structure);
- Income from holiday properties.
Provided that your property meets these conditions, calculating your rental income basically comes down to filling out the correct forms and providing the lender with the necessary paperwork. What you need to provide depends on whether the property has a pre-existing lease history.
Net Self Sufficiency Test
Net self-sufficiency from renting a property is calculated by dividing rental income from the property by the full payment of the mortgage.
All rentals for apartments, including those already occupied, are summed up. The rent is multiplied by the larger of the appraiser’s estimates for vacant space and maintenance, or 75% of the total rent.
The total must cover the full payment of the mortgage, which consists of principal, interest, taxes, and insurance (PITI).
Unacceptable predicted rental income
However, there is a possibility that predicted rental income can be refused by underwriters. First of all, you may have trouble with calculating your rent (for instance, if the rent was paid in cash). Because, lenders usually ask for the copies of checks in order to be sure about the rent is regularly being paid on time or not.
You must be prepared to prove your income by providing correct documentation. Talk to the lender to get an idea of the specific documentation that should be included for your rental history. And don`t forget about making copies before submitting documents to the lender.
Rental income and federal tax returns
When federal tax returns are used to calculate qualifying rental income, the lender, before doing any calculations, has to add back in any deducted expenses (depreciation, homeowner’s association dues, taxes, insurance, etc.) to the borrower’s cash flow. Any documented one-off property costs may be added back.
The income is then averaged over the months that the prospective borrower used the property as a rental unit during the last tax year
Debt-Service Coverage Mortgage
Using future rental income to obtain a mortgage without using the personal debt-to-income ratio is possible with a non-QM loan. The real estate is based on the cash flow from that property, where the income from the project must cover the full payment of the mortgage.
The debt service ratio calculator = net operating income divided by the total mortgage payment (PITIA). They allow one to four unit properties and even non-warrantable condos.