Can you use projected rental income on your Primary Residence to qualify for a Home Loan?

April 9, 2014 — Leave a comment

question mark manA better question….can you use the projected rental income on your current home if you plan to convert it to a rental property when you buy your new home?

The short answer….YES!

The long answer….YES…and NO! It really depends on a number of factors, let’s break them down.

Here’s the scenario – you’re shopping for that perfect home, driving neighborhoods on Sundays, surfing the web after the kids are asleep, talking with real estate professionals, and getting excited – you have the bug!

The dilemma – should you sell your current home OR convert it to a rental property?

The second dilemma – IF you decide to convert it to a rental, can you use the projected rental income to qualify for a new mortgage?

The answer!

1. IF you have at least 30% equity in your current home (supported by an appraisal) then you can use 75% of the rental income to offset the mortgage payment on the new home. The rental income must be documented with the following:

  1. Copy of the executed lease agreement
  2. Receipt of a security deposit from the tenant
  3. Verification of deposit into your account

 

2. IF you do NOT have at least 30% equity in your current home then you’ll need to qualify with your current house payment. Additionally you’ll need to have 6 months worth of mortgage payments for your current home + the new home (and 6 months for every other property you own, if applicable).

  1. For example – let’s assume your current house payment is $1,000 and the house you’re buying comes with a $2,000 monthly payment.
  2. You will need to have 6 months worth of both payments ($3,000 X 6 = $18,000) verified in the form of ‘reserves’ via an asset statement.
  3. This is in addition to the monies needed at closing.

 

3. IF you already own rental property then lenders will require 2 years of tax returns with Schedule E’s documenting the rental income (or loss).

disclaimerDISCLAIMER! – like snowflakes, there are no two mortgage scenarios alike.  Everyone’s situation is unique in their own way.  Please reach out to me with scenario specifics and we’ll run the numbers together.  I’m always happy to help!

 

You can ALWAYS get me at cole@coleholmes.com

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