Your income is one of the most significant factors lenders consider when you are trying to qualify for a purchase or refinance mortgage on a home. You can use rental income on property that you already own, as long as you can establish a history of renting it and show that it is likely to continue. You can also use projected rental income for a property you are buying or plan to convert into a rental. In either case, only a portion of the rent you collect can be used as rental income to qualify for a mortgage. The exact guidelines on how to use rental income depend on the lender, loan program and property type. Show
TipRental income from your primary residence or a second home cannot be used to qualify for a mortgage. But, if you rent out the guest house above your garage, for example, that rental income can be used and must be reflected in your tax return. Understanding Debt-to-Income and Rental IncomeThe debt-to-income ratio, or the ratio that lenders use to determine whether you can afford a new mortgage, is a significant factor in qualifying. Debt-to-income ratio compares the minimum monthly payments you owe on recurring debts, such as auto loans and credit cards, to your gross monthly income. The higher this ratio, the riskier it is to lend to you. The lower the debt-to-income ratio, the more favorable the mortgage terms and payment you receive. The lender adds part of the rental income you collect or will collect to any gross income you have, such as wages from your job. The lender considers this your total income to determine your debt-to-income ratio. Understanding Net Cash FlowLenders only use a portion of your rental income, such as 75 percent, to account for the expenses or losses landlords inevitably face. The amount they use is known as net cash flow. Often referred to as the vacancy factor, the percentage a lender uses to calculate net cash flow can vary. It is typically 75 percent, or 0.75 multiplied by the total rent you receive each month. The resulting figure is added to your gross income. The 25 percent of the rental income not used by the lender represents the losses you take due to vacancy, ongoing maintenance and repairs. Proving Rental IncomeIn general, lenders review the last two years of your tax returns, including IRS Form 1040, Schedule E, or Rental Real Estate Income and Expenses if using a business tax return. A lender may also require a copy of your lease agreements to verify rental income. When using rental income not yet received because you are buying a rental property or will convert a property you own to a rental, the lender will likely seek a professional opinion of rental value from an appraiser. In addition to the appraisal report lenders order to determine the market value of the home you are buying or refinancing, the lender may order a rent schedule, which reflects current rent values for comparable rentals in the area. If buying a two- to four-unit property, the lender requires a small residential income property appraisal report, which shows rent values for all units on the property. Using rental income to qualify for a mortgage is a bit more complicated than using wages from employment, but it is possible in many cases. And it’s worth the effort to understand the process of claiming rental income for a mortgage when you want to invest in rental properties. You need to learn how a loan officer views your rental income for mortgage underwriting purposes and know what information and documentation to provide with your mortgage loan application. Let’s discuss some of the most common questions we get about using rental income to qualify for a mortgage. We’ll give you the answers you need to help you decide if claiming rental income for a mortgage is the best option for you. Can I use rental income to qualify for a mortgage?In many cases, you can use rental income to qualify for a mortgage as long as you have adequate documentation of the actual income earned (or of the predicted income if you have owned the property for less than a year). But there are some cases in which you cannot use rental income. How does a loan officer define rental income?Rental income is money earned from tenants who occupy real estate you own. Loan officers make distinctions between:
 BUY A HOME IN 4 EASY STEPSGet your free guide and learn how to simplify the home buying process with our DOWNLOAD How is rental income calculated for mortgage purposes?Generally speaking, if the property has a history of rental income being paid consistently, and there is no indication that the cash flow would decrease or stop, loan officers will use the income from your tax returns to calculate rental income for your mortgage qualification. But suppose there isn’t a history of rental income (perhaps because the property is newly acquired or has recently been converted from a primary residence to a rental property). In that case, loan officers will typically calculate qualifying income as 75% of the gross rent on the lease or 75% of the predicted rent reported by a licensed appraiser, whichever amount is less. What type of loan programs are available to those that want to use rental income to qualify?You can use rental income to qualify for several loan programs:
What best practices should I know about before applying as a rental property owner?Here are a few tips to help you qualify for a mortgage as a rental property owner:
We can help you create a personalized mortgage planOur team of experts will design a mortgage plan that’s unique to your goals. What documentation do I need to provide to show evidence of my rental income earnings?The documentation required to claim rental income for a mortgage depends on the rental history of the property. In general, if you have owned the property for long enough to have filed an income tax return, your income tax return will be needed as documentation, along with federal tax Form 1007 or Form 1025 as applicable. If there is little or no documented rental history, you will need to provide the signed lease and a Form 1025 showing a licensed appraiser’s opinion of market rental rates. With so many factors contributing to the requirements for using rental income to qualify for a mortgage, it pays to discuss your options with your dedicated OVM loan officer. Contact OVM Financial at 757-296-2148 for a free consultation. And when you’re ready to apply for your mortgage, you can get started online at https://www.ovmfinancial.com/online-application/. Talk to a Loan OfficerGet a personalized plan or ask any questions to our dedicated loan officers. By OVM Financial , How to Use Rental Income to Qualify for a Mortgage Share Can I count future rental income on a mortgage?If you're planning to buy a rental property, you might be able to use a portion of the rental income to help you qualify for your mortgage. Future rental income—the money you expect to receive from tenants renting out your property—can be used as part of your qualifying income.
How is future rental income calculated for a mortgage?If the renter has a tenant, lenders will take a percentage of the income that's outlined on a lease and use that to determine projected rental income. They usually use 75% of your total reported income — 25% is subtracted to account for potential vacancies and ongoing maintenance.
Can you use projected income for mortgage?Can I Use the Future/Expected Rental Income to Qualify for the Mortgage on the Property? Yes, you can use the expected rental income to offset the monthly mortgage payment of the property you are buying. In fact, you can use that expected income for an investment property or one you plan on living in.
Can I use future Airbnb income to qualify for mortgage?Vacation rental buyers and owners cannot use future rents to qualify no matter how strong the vacation rental market might be. Vacation rental owners can only use vacation rental income to help qualify for a mortgage loan if the income is clearly shown on tax returns.
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How to use future rental income to qualify for mortgage
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