We’re able to consider rental income in qualifying on a loan application, subject to these underwriting rules that are within written lending guidelines. There are three different categories of rental income:
- Rental income from investment properties currently owned.
- Projected rental income from the property being purchased
- Rental income that’ll be in place for the applicant’s current home, being vacated to live in another home.
1. Rental income from investment properties currently owned.
We review two years of tax returns and calculate rental income based on a two year average of the income and expenses for rental properties. If a property has only one year’s history of tax returns, we’ll qualify off that year’s income. If a property was recently rented and the rental income doesn’t yet appear on a filed tax return, under conforming and government lending guidelines we’ll document rental income with a current lease but count only 75% of the rental income to offset the property’s expenses.
2. Projected rental income from the property being purchased
If a home buyer is purchasing a property as an investment property, and/or a multi-unit property and some of the units will be rented out, we can consider 75% of the market rent of the property/unit not being occupied. The appraiser will determine the rental value of the unit when they complete the appraisal for the market value.
3. Rental income that’ll be in place for the applicant’s current home, being vacated to live in another home.
If a homeowner is vacating a current primary residence and moving to a new primary residence, it’s possible for us to consider 75% of the rental income to offset the housing expenses. But, this’ll require a homeowner obtain a signed 12 + month lease to a new tenant, and the tenant cannot be a family member. Fannie Mae and VA guidelines will not require we appraise the to-be-vacated property. FHA and Freddie Mac require we do complete an appraisal. FHA requires the loan amount on the to-be-vacated property be under 75% of the appraised value, and Freddie Mac requires the appraiser’s opinion of market rental income to support the monthly income from the newly signed lease to tenant.
Both VA guidelines and jumbo loan guidelines can/may in addition to the aforementioned rules, require at least two years experience managing rental properties for rental income to be considered as qualifying income.
For all loan programs, if a homeowner intends to rent out their current home but the rental income is not needed to qualify them for their next purchase, we’d not pursue documenting rental income.
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