How to Use Rental Income to Qualify for a Mortgage
Questions you may have about when you can use rental income to qualify for your mortgage.
When can you use rental income toward qualifying for a home loan?
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.
1. 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 banker 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. 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.
2. 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 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 banker 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.
3. The home I’m interested in buying for myself has a small additional living space; can I use 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.
4. 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 rental income from my current residence toward qualifying?
Yes, you can! Your mortgage banker will need you to provide a copy of an executed lease agreement and the security deposit check or first month’s rent check. You will be able to use 75% of the lease amount toward your qualifying income.
5. I own an investment property already—can I use rental income from that property toward qualifying for a home loan?
Your mortgage banker 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 banker to find out how much money can be used toward qualifying in your specific scenario.
6. 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 have made if I had owned it for 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 banker 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 you might have about rental income and qualifying for a home loan. Our experienced mortgage bankers are ready to answer any additional questions you may have.
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