Deep Dive: Using Rental Income to Qualify for a Home Mortgage

Lately I’ve had a fair amount of folks ask me about using rental income to qualify for their home loan. Basically, use the income from the rental properties as effective income to pay on the new mortgage. It can be done. But it depends on a lot of varying factors. How much rental income you can use depends on the loan type and how much rental income you claimed on your taxes.

Using rental income from an investment property:

If you own another property, that has a tenant, you can use the income you receive from that property as income towards the new mortgage. We will look at your schedule E from your personal tax returns and use the NET income towards your purchase. I’m emphatic about net income because mortgage lenders will look at what’s left, after all of your deductions, as your income. For example, let’s say you receive $1,000 per month from a rental property and there is no mortgage on the house. So you are able to deposit the entire $1,000 each month. At the end of the year, you will have made $12,000 from your rental property. When you file your taxes, you have the opportunity to reduce that income by costs associated with the property. So if you had to replace a water heater, or make a plumbing repair during the year, you can write off those expenses. Let’s say repairs cost you $4,000 during the year. On your tax return you would write off the $4,000 so your net income from the rental is $8,000.

There are things we can add back to the income. We are generally allowed to add back insurance, mortgage interest, taxes, and other HOA dues.

You can see how it is easy to overestimate the amount of money you can count from your rental property towards your new home.

Using Rental Income from the Subject Property:

Another option for use of rental income is from the property you are buying. So if you are seeking to purchase a two to four unit building, and live in one of the units, you can use the income, or potential income from the other units towards your qualifying income. Under this approach, you won’t be able to produce tax returns, as discussed above, so the lender will order a special appraisal to determine the likely rental income from the other units. The amount of rental income you can use towards your effective income depends on the type of loan you are getting. It will be either 65% or 75%.

If you are looking to purchase or refinance a home, don’t hesitate to contact me today!

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