Determining Net Rental Income when Qualifying for a Mortgage

January 21, 2011 by 8 Comments

EDITORS NOTE – 11/22/2014: Oh the joys of writing a mortgage blog… guidelines change constantly. Information in this post is not current.  Please check out this more recent article on rental income for conforming mortgages here. And if I can help you with your investment (or any) property) in Washington state, please contact me!

Rental income is generally not fully credited when qualifying for a mortgage.  Lenders will “discount” the rent because of the cost and risk associated with owning investment property.  If someone does not have at least two years history as a landlord, they may not be able to use the rental income at all and may have to qualify with the full mortgage payment.

Conventional financing allows a qualified investor to receive credit for 75% of the gross rental income.  From this figure, property taxes, insurance, home owners association dues and any mortgage payments are deducted to create the amount of rent (positive or negative) that the lender will use for qualifying purposes.

For example, a property has a $2,000 total mortgage payment (PITI) with no HOA dues and receives rental income of $2,000 per month.

$2,000 rental income x 0.75% = $1,500.  $1,500 less the mortgage payment of $2,000 creates a net rental income of negative $500 per month.   This would be factored as a debt and not a credit or “breaking even” on the loan application for qualifying.

Of course if there are multiple investors involved, the net rental income is split accordingly.

FHA does not have the same two year history requirement for existing rentals as conventional loans do.  The vacancy factor in the Seattle area is 15% which means that 85% of the rent is allowed to be factored as income.  FHA loans may use future rental income (no 2 year history) when converting an existing home into a rental if the borrower is being relocated or if there is enough equity in the subject property.

To document rental income, be prepared to provide tax returns and signed lease agreements. Lenders will use the net income from your tax returns.

When you have rental properties, be prepared to have additional reserves (savings) required based on how many properties are owned.

If you have questions about qualifying for a mortgage for a home located in Washington State, please contact me.  If you would like a personal rate quote from me for an home located in Washington state, click here.

Filed Under: Fannie, Freddie and FHFA, FHA, Investment Property, Underwriting and Qualifying Tagged With:

Reader Question: Converting Current Home to Rental

November 17, 2010 by Leave a Comment

I enjoy receiving email like this from my readers:

I currently own a condo as my primary residence and am getting married soon.  The mortgage and title is in my name only.  We will soon like to look at moving to a bigger place and would apply for a mortgage on our new primary residence together while still keeping the condo to rent out.  How will this situation affect getting approved for the new loan?  Are there any changes that will need to be made to my current condo mortgage since it will no longer be my primary residence?  Thanks in advance for your help! 

Unless you're planning on refinancing your existing condo, there shouldn't be any changes that you need to make that mortgage because you are renting it out.  If you are currently refinancing or planning to refinance the condo, you should let your mortgage originator know of your intentions to use the property as an investment property.  On a side note, you may also want to check with your Home Owners Association or condominium bylaws to make sure that investment properties are allowed.

Qualifying for the new home will be impacted by the type of financing you select and the amount of home equity you have currently in the condo.  If you have less than 30% home equity, you'll need 6 months reserves for all of your mortgages (your current residence/future rental and the new home) if you're considering conventional financing or you must qualify with both mortgage payments.  FHA does not have this guideline at this time. 

In addition, if you do not have a documented current two year history as a landlord, you may find that the entire mortgage payment (including the home owners association fees) may be factored into your debt with no credit for any rental income you receive on the new home.

Lenders are looking for extra reserves and making sure that people who are leaving their current homes have enough "skin in the game" (equity) so that they're less likely to walk away from their former residence once they've closed on their new home.

By the way, if the home you're buying with your future bride is located in Washington state, I'm happy to help you with your mortgage!

 

Filed Under: Condos, Investment Property, Residential Purchase

Buying a Home with Owner Occupied Financing After Refinancing Your Home as Owner Occupied

October 28, 2010 by 13 Comments

I’m seeing a trend where home owners are refinancing their current home as “owner occupied” and then weeks after closing, try buying another home as “owner occupied”.  You cannot have two owner occupied homes.   It’s really that simple. 

I’ve had a couple of surprised people contact me who thought they could buy a home just following a refinance only to learn by their mortgage originator that they have to finance the new home as an investment property.   Financing an investment property not only offers a slightly higher interest rate than a mortgage for a primary residence, it also has tougher guidelines with higher down payment requirements and greater reserves (savings).  

If you are considering refinancing your primary residence and possibly buying another home, you should discuss this with your mortgage originator as soon as possible.  You will be signing a deed of trust which has language that you intend to occupy that home for 12 months.  Some folks might feel that the “intending to occupy” means that they can refinance as owner occupied and a couple months later buy “owner occupied” and odds are, they will be caught.  It may be purely unintended for this to happen, but be prepared for the possibility the new purchase to be treated as an investment property, even if you’re going to live there. 

If you’re considering taking advantage of the lower home prices and lower rates, you may want to delay your refinance of your current “primary residence” or talk to your mortgage originator about refinancing your current home as an investment property.  Your next purchase might qualify as a second home, however the property typically needs to be about 50 miles away from your primary residence (the one you just refinanced) and it is the underwriter’s call on whether or not the second home “makes sense”…this can be a real grey area.  

Life happens and we know plans change. Be upfront with your mortgage professional if you’re thinking about buying a home.  You may want to ask them to verify with your personal scenario with an underwriter.  Finding yourself in the middle of a transaction to buy your next home and having it declined as owner occupied can be an expensive experience.

Related post:

Is it a Primary Residence, Second Home or Investment Property

Can I Convert My Existing Home to an Investment Property to Buy My Next Home?

Filed Under: Investment Property, Refinance, Residential Purchase Tagged With: , , , ,

Fannie Mae’s HomePath Program

October 15, 2010 by Leave a Comment

EDITORS NOTE: Fannie Mae is no longer offering the FannieMae HomePath mortgage program. If you are considering buying a Fannie Mae HomePath property (foreclosure that is owned by Fannie Mae) in Washington state, I’m happy to help you.

Fannie Mae’s HomePath program is available to purchase qualified foreclosed homes (owned by Fannie Mae) with expanded conventional guidelines, competitive mortgage rates and often times, with special incentives.

[Read more…]

Filed Under: Fannie, Freddie and FHFA, First Time Home Buyer, Homepath, Investment Property, Residential Purchase Tagged With: , , ,

Can I Convert My Existing Home to an Investment Property to Buy My Next Home?

April 27, 2010 by 13 Comments

EDITORS NOTE: These guidelines have changed. If you’re buying a home in Washington state, please contact me for current guidelines.

This is a common question I’m asked these days…mostly because many home owners don’t have as much equity as they would need in order to sell their current residence.  With home prices being at their lowest in years, many want to take advantage and buy their next home and simply rent out their current residence.

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Filed Under: Fannie, Freddie and FHFA, FHA, Investment Property, Residential Purchase, Underwriting and Qualifying, USDA Tagged With: ,

Calling All Seattle Flippers

September 6, 2008 by Leave a Comment

Flip_2

If you have flipped 10-12 house in the Seattle area, A & E’s "Flip This House" is looking for YOU!   Read all about it here.

A tip of the hat to ARDELL.

Filed Under: Investment Property

A Question Regarding Mortgage Rates for Investment Property

July 1, 2008 by Leave a Comment

One of my clients contacted me with this question:

"We’re in the early stages of thinking about buying a rental house.  If we were to buy a house for $260,000, how  much would we have to put down and what would the payments be like for a 30 year mortgage?"

Mortgage interest rates for investment properties are priced based on loan to value (how much money the investor is putting into the property) and the lowest mid-credit score of the borrower(s).   The price breaks are based at 70, 75 and 80% loan to value (LTV).   Based on a sales price of $260,000; here is what current rates would look like using a 30 year fixed rate mortgage and a mid-credit score of 720.

Non Owner Occupied with 20% Down — Loan amount of $208,000 with a rate of 6.875% (APR 7.074%).  Principal and Interest (P&I) = $1366.41 plus taxes and insurance (on all payments shown).

Non Owner Occupied with 25% Down — Loan amount of $195,000 with a rate of 6.750% (APR 6.952%). P&I = $1264.77.

Non Owner Occupied (NOO) with 30 % Down — Loan amount of $182,000 with a rate of  6.625% (APR 6.830%).  P&I = $1165.37.

Another option to consider may be a 30 Year Fixed Rate with the 10 Year Interest Only payments.  You must qualify at the fully amortized rate and after 10 years, assuming you still have retained the mortgage, the mortgage balance at that time will be amortized for 20 years.  If you never pay additional towards your principal during the first 10 years, your mortgage balance will be the same as when the mortgage was originated.  Here are rates based on the same scenario above with the interest only feature.

NOO with 20% Down — Loan amount of $208,000 with a rate of 7.250% (APR 7.439%). Interest only payment of $1248.00.

NOO with 25% Down — Loan amount of $195,000 with a rate of 7.000% (APR 7.188%).  Interest only payment of $1137.50.

NOO with 30% Down –Loan amount of $182,000 with a rate of 6.875% (APR 7.066%). Interest only payment of $1042.71.

I’ve written more about about financing investment properties here.

Do you have a mortgage question for me?  Send me an email, I’m happy to help and your question may help others.

Filed Under: Investment Property

Is it a Primary Residence, a Second Home or Investment Property?

April 23, 2008 by 437 Comments

Every so often, someone will be interested in financing for a home they will not be living in 100% of the time…they want the best rate which is “owner occupied”.   It’s crucial to know the difference in your lenders eyes and to be completely upfront so you avoid committing fraud.  Bottom line, the property and situation needs to make sense to the underwriter.   Here are some basic definitions:

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Filed Under: Investment Property, Mortgage, Underwriting and Qualifying Tagged With: , , ,
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