Why your rental agreement may not cut it for a mortgage

Rental income can be a double edged sword if you need it
to qualify. Here’s what to know about your new rental future rental
income when it comes time to getting a mortgage…

Some mortgage companies will give you the benefit of using fair
market rents for income when buying a rental property. The type of
financing is called non-owner occupied and it does cost more than
primary home financing. Expect a rate twenty five to thirty five basis
points higher than owner occupied and secondary home transactions.

Where it may get sticky

Let’s say you have a rental property that you had for the last few
years. Your new rental agreement is higher than the rental income from
previous years which are identified on your tax return.You cannot use
this new income to qualify as there is no history of that income.
Lenders will perform a rental property analysis taking into
consideration depreciation, expenses, insurance, mortgage, HOA and
interest paid to banks. The net income of this lender averaging is what
is used to determine how your rental with hurt, help or have no affect
on your ability to borrow.

Mortgage tip: know this- showing big losses on your Schedule E
will limit your borrowing power. It does not automatically preclude you
from qualifying, but it does count into your debt to income ratio. Your debt to income ratio is a benchmark factor lenders use to assess how much debt load you can carry against your income.

How rental income comes together for a mortgage

General lending rules with rental properties:

• Projected rents may used by most lenders as an offset against the mortgage payment at 75% gross market rents determined with an appraisal when buying a property.
• If you owned a rental property for the last 12 months, lender averages your expenses which may impact your income ratios and ultimately how much mortgage you can handle.
• If you bought a rental in the last year, but have not yet filed your return you can use 75% of the rents with a rental agreement bypassing the rental averaging lenders use.

How you report your expenses on your Schedule E will make all the
difference in how you qualify with a lender. Even if a property is
showing a loss you it still may make sense to borrow as keeping the
property overtime might mean carry forward losses to offset against
future taxable earnings. Alternatively, selling the property may net
extra funds to purchase another property minimizing any rental losses in
the process. **Please note always consult with a licensed tax professional regarding your unique situation.**