Qualifying for a Mortgage with Rental Income
When it comes to qualifying for a mortgage, rental income can be an important factor. If you own a rental property or are considering purchasing one, understanding how lenders view your rental income is key to getting the best loan terms possible.
In this article, we’ll discuss what you need to know about using rental income to qualify for a conventional mortgage.
Applying for Conventional Mortgage: What You Need to Know
First and foremost, it’s important to understand that not all types of mortgages allow you to use rental income as part of your qualification process. Conventional loans are those whose size limits are set by the Federal Housing Finance Agency (FHFA). These have specific requirements when it comes to claiming rental income on your application.
Further, in order to qualify for a conventional loan with rental income factored in, borrowers must meet certain criteria including having at least 620 credit score (considered “fair”), a debt-to-income ratio (DTI) below 50%, and sufficient cash reserves available after closing costs have been paid.
Additionally, if you plan on using potential future rent from tenants as part of your qualification process, then there may be additional requirements, such as providing proof that the tenant has signed a lease agreement, or other documentation showing their intent to pay rent in the future.
It’s also crucial to know that any prospective borrower understands how taxes work when dealing with investment properties. They will likely need to file IRS (Schedule E) forms, which detail all sources of passive or active income related to their rentals, to claim any deductions associated with them on their tax returns.
Ultimately, if you decide to sell off any investments, then you’ll need to subtract your cost basis from the selling price to find out exactly how much profit was made, which is taxable according to federal law depending upon individual circumstances.
Requirements for Conventional Mortgage when Using Rental Income
If you’re planning to use rental income to qualify for a conventional mortgage, there are several things you need to keep in mind. Here are some of the key things you should know:
- Minimum rental income requirements. Fannie Mae, the largest buyer of conventional mortgages in the United States, requires that the borrower have a minimum of 24 months of rental history. This means that you must be able to show that you have received rental income for at least 24 months. Fannie Mae also requires that the borrower can document at least 75% of the rental income that will be used to qualify for the mortgage.
- Cash reserves. Fannie Mae requires that borrowers have a certain amount of cash reserves to cover any potential rental income disruptions. This means that you need to have a certain amount of cash in the bank that you can use to pay the mortgage if the rental income stops coming in.
- Property management. If you own multiple rental properties or don’t have a history of managing rental properties, Fannie Mae may require that you work with a professional property management company. The management company will collect rent and handle other aspects, which helps ensure that the property remains profitable.
- Debt-to-income ratio. Your debt-to-income ratio (DTI) is an important factor that lenders will consider when you apply for a mortgage. DTI is the percentage of your monthly income that goes toward paying debts, including the new mortgage payment. Fannie Mae generally requires that the DTI is no more than 45%.
- Documentation. To qualify for a mortgage based on rental income, you will need to provide documentation of your rental income, such as lease agreements or tax returns. You will also need to provide documentation of your expenses related to the rental property, such as mortgage payments, property taxes, and insurance.
In summary, using rental income to qualify for a conventional mortgage can be a great way to increase your buying power and invest in real estate. However, it’s important to understand the guidelines and requirements set forth by Fannie Mae and to work with a lender who has experience with rental income mortgages.
Understanding What Fannie Mae Guidelines Are
Fannie Mae guidelines refer to the underwriting standards and requirements set forth by the Federal National Mortgage Association (FNMA), also known as Fannie Mae, for mortgage lending. It is a government-sponsored enterprise that provides liquidity to the mortgage market by purchasing mortgages from lenders, securitizing them, and selling them to investors.
It has established specific guidelines for underwriting mortgages that involve rental income, which is crucial for individuals who are looking to qualify for a mortgage based on it. These guidelines provide a framework for how rental income should be documented, verified, and used to qualify for a mortgage.
In general, to use rental income, borrowers will need to demonstrate a history of receiving rental income, typically for at least two years. They should also provide documentation of rental income, such as lease agreements or tax returns. Lastly, it requires that borrowers have a certain amount of cash reserves to cover any potential disruptions.
The importance of understanding and adhering to Fannie Mae’s guidelines when applying for a mortgage with rental income is that doing so can help borrowers qualify for a mortgage they may not otherwise be able to afford. Additionally, by following such guidelines, lenders can ensure that the mortgage they are providing is a sound investment that meets the standards.
Conclusion
Using rental income to qualify for a mortgage can be a great way to increase your buying power and invest in real estate. However, it’s important to understand the guidelines and requirements set forth by Fannie Mae. This includes demonstrating a history of rental income, providing documentation of rental income and expenses, and having sufficient cash reserves.
By following these guidelines, borrowers can increase their chances of qualifying for a mortgage based on rental income and lenders can ensure that the mortgage they are providing is a sound and rational investment.
FAQs:
Q: Can I use my current rental property’s monthly rent towards my mortgage?
A: Yes! You can use the current monthly rent from an existing property towards qualifying for a conventional mortgage loan provided that all other eligibility criteria are met, including having a good credit score and low DTI ratio along with adequate cash reserves available after closing costs have been paid off.
Q: What documents do I need to prove my potential future rents?
A: Depending upon the lender’s policies & procedures; typically required documents include copies of signed leases between landlord & tenant(s) along with proof of payment history over the past 12 months if applicable. Other items such as bank statements showing deposits made directly into the landlord’s account could also help bolster the case.
Q: Are there any restrictions on the number of properties allowed to purchase through conventional loans?
A: Generally speaking, most lenders cap the total number of properties financed through a single person as 10 units; however, this varies based on an individual’s situation, so it’s always wise to check local regulations prior to applying just to make sure everything goes smoothly throughout the entire process.
