By Doug Goelz, Mortgage Services
In many cases, rental income can help you qualify for a mortgage, but lenders treat rental income differently depending on the source of the rental income and the property you are financing. Below are some ways you can use rental income to qualify for your next mortgage.
If you are buying a 2-to-4 unit property and intend to rent some or all of the units, you can use 75% of the rents as determined by a rent survey as qualifying income. An appraiser will do the rent survey and determine the market rents for the units to be rented. In our market, where long-time tenants may not be paying market rents, or where units may be delivered empty, using market rents rather than actual rents can be beneficial in qualifying for the mortgage.
If you are refinancing a 2-to-4 unit property where some or all of the units are rented, the lender looks at the net income (rent minus cash expenses, but not depreciation) shown on your Schedule E for the last tax year. Schedule E net income is not always good for qualifying income if the unit(s) were empty for an extended period during the year, or if you did major remodeling and had significant one-time expenses during the year. If Schedule E shows a loss (before depreciation), the loss will reduce your qualifying income.
You cannot count any rental income (say, from a mother-in-law unit, a boarder, or a garage) from a single family residence (house or condo) you are buying as your primary residence. However, if you are buying a different primary residence and will be renting your current primary residence once you move, you can use 75% of the rent on the property you are leaving as qualifying income for the mortgage on your new home. To document the rent on the property you will be leaving, you will have to have a rental agreement with the new tenant and a cashed deposit check (say, for 1st month’s rent and a security deposit) from the new tenant.
If you are refinancing a single family property that is your principal residence or 2nd home, the lender will not count any rental income on the property (such as boarder income or Air BNB income) as qualifying income. In fact, if there is boarder income or Air BNB income for the property on your income taxes, the lender probably will ask for an explanation (but it is not necessarily a deal-killer).
Finally, if you have rental income showing on Schedule E from a property other than the one you are financing, you can use the rental income from the other property as qualifying income for your new mortgage.
Complicated? A little. Are there exceptions to these rules? In some cases, yes. If rental income may be part of your financing scenario, feel free to get in touch with me at 415-730-4665 or [email protected] to discuss how it may impact your financing.
