Financing in Chicago>Question Details

Abigail Buss…, Home Buyer in Oak Park, IL

Using rental income when getting a mortgage approved?

Asked by Abigail Bussard, Oak Park, IL Mon Feb 6, 2012

Can anyone explain what the guidelines are for being able to use income from a rental property when getting approved for a loan. I own a home that is currently rented out, and am trying to get approved for a loan on another home (my primary residence). I'm pre-approved, but the outstanding loan on my rental property is throwing my ratios a tiny bit high (45.8%). Here are the details:

1. I don't have 20% equity in the rental property, nor do I have 20% of the initial loan amount paid down due to the market crash.

2. I have had a renter there for 5 months

3. I do not have 6-12 months in reserves

Any thoughts?

Help the community by answering this question:


Typically lenders will want to see 2 years of schedule E's filed on the rental property but there are lenders that will take one year of Schedule E PLUS proof that the lease runs thru one more year (for 2 total).

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1 vote Thank Flag Link Wed Jul 22, 2015
If you've had a renter for less than a tax year, you can use the leases unless the lender has an overlay that says you can't. Usually underwriters don't use the return from the previous year because it usually doesn't portray the correct rental income (at least my underwriters have always agreed with my logic). Often times properties incur costs to update/market the property that you can't back out by saying it's an isolated occurence because there isn't another tax return to backup your statement.

As for reserves, WOW, this requirement varies widely between lenders, this was a very enlightening thread. We (my company) only require two months reserves per property outside of the new owner occupied one.
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1 vote Thank Flag Link Wed Mar 7, 2012
John- when you enter the the world of ending, you have to check your common sense at the door. All of us can go on ad nauseum about the inconsistencies and illogical rationale that can come into play with real estate lending.

No matter what the FICO score, or the ability to pay, depending on their model, the portfolio guidelines, their ability to sell the loan into the secondary market and God knows what else, there is a level of risk they cannot tolerate and their perception of what that is often varies greatly from that of the borrower.

BTW- 2nd mortgages are considered a very high risk product, and are not a common loan in this environment for most borrowers. Welcome to 2012 in our world.
1 vote Thank Flag Link Tue Feb 7, 2012

I'm a little confused by your answer. How would anyone that owns rental property ever qualify for a 2nd mortgage by your rationale then?

Why would someone extend me credit - for one, my credit score is 800, I've never missed a payment on anyone, or given any creditor any reason to believe that I use bad judgment when making financial decisions. My DTI is 45.7%, and this is NOT counting in my rental income. With 75% of that counted, my DTI would be around 40%.

I guess my question is....what does it matter how many properties you own, or what equity you have in them, as long as you are earning enough to cover them all and that fact is reflected in your DTI?

1 vote Thank Flag Link Tue Feb 7, 2012
Sounds like its pretty on base, but I would call a lender directly. There is usually more things they need to know if they can help you out with a better rate. Call up 3 or 4. Some lenders can do different things for you.
1 vote Thank Flag Link Mon Feb 6, 2012
Recently had a situation similar to yours here in our office. The lenders are asking for the property to have a 30 percent equity stake in order to be able to use the rental income.

Sean Cochran
V.P. Marketing and Development
Quality Mortgage Lending
630-470-6830 office
630-330-2229 cell
"We do FHA loans down to a 600 middle credit score"
"We do USDA loans down to a 620 middle credit score" (no money down)
"We do $100 down payment FHA program"
"Unlimited loan to value refinance on Fannie/Freddie refinances" (only on loans originated before May 31st 2009)
0 votes Thank Flag Link Mon May 13, 2013
I purchased a town house that is now rented with a one year lease I want to to use this property to get a line of credit to up-date some how do I go about doing this .the property is fully paid for
0 votes Thank Flag Link Wed May 8, 2013
One more thing, you will need the 6 months of reserves, so that could make this deal not work no matter what.
0 votes Thank Flag Link Tue Feb 7, 2012
John, if your loan gets approved with the 45.7 DTI by the desktop underwriting system, there are plenty of lenders out there who will give you a loan.
Sean's answer on using rental income is more accurate if you have been renting it out already. What you may need to do to use rental income is to file your return for 2011 and show the rental income, a copy of the lease, and possibly even the fact that you received the security deposit. The 30% equity issue is when turning a primary residence into a rental property. If you do not have the income on a tax return, Chase will accept a lease, but will want to see the amount of rent that you are claiming going into your account.
Right now I am trying to get someone approved for a refi that makes total sense, but the numbers just don't work because all these guidelines aren't being met.
0 votes Thank Flag Link Tue Feb 7, 2012
Hello John
If you have already vacated the property - which I would assume you have becasue you have renters, then you can use the rental income once you file your tax returns and disclose the rental amount.
However based on the information listed you should not have a problem qualifying for a loan - the debt ratios are not ideal but they are still within range
I would be happy to offer assistance or answer any further questions. Please feel free to contact me at anytime
Sam Sharp
Senior VP of Mortgage Lending
Guaranteed Rate
0 votes Thank Flag Link Mon Feb 6, 2012
Find a good lender. There are several other factors involved here, and your ability to get the loan you are looking for is going to be specific to you. Your credit, assets and the values of the homes, are all part of the equation the lender will use to assess the risk of lending to you in this situation, but there are other considerations.

Michael Plating at Inlanta Mortgage is my miracle worker when it comes to these kinds of loans.

(630) 842-3328

good luck.
0 votes Thank Flag Link Mon Feb 6, 2012
It's really pretty simple. If it was on your tax return last year as a rental property and you've got all the documentation to back it up, you're good to go otherwise it's 30% equity required on a conventional loan and 25% on an FHA loan. It's incumbent upon you to prove that equity via a current appraisal.
Sean Lowry -Pacor Mortgage Corp. 312.786.5844
0 votes Thank Flag Link Mon Feb 6, 2012
FHA the borrower is required to have 25% equity to use rental income to offset current PITI and a FNMA or FHLMC loan requires 30%? FHA does not require reserves unless the AUS requires reserves. FNMA and FHLMC require 6 months PITI for both current principal residence and proposed property (may be reduced to 2 months with additional requirements).

Let me know if I can help further.

0 votes Thank Flag Link Mon Feb 6, 2012
you have very little that makes banks happy.. trust me your lender gets paid on commission and this is not some out of the box rule.. I would be surprised if you can get any credit for the situation your lender or call me for a list of the best of the best but I think they will be very similar
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0 votes Thank Flag Link Mon Feb 6, 2012
I'm not a lender, but this sounds about right. Lenders have gotten very strict when it comes to counting rental income. Talk to a few local lenders or mortgage brokers to confirm. You might find one who's willing to work with you. Good luck!
0 votes Thank Flag Link Mon Feb 6, 2012
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