FHA qualification question

Asked by Ktbailey, Crystal Lake, IL Fri Dec 2, 2011

I've now been to two different loan officers, and gotten two different answers. I own a condo, which I've had rented out for only 3 months now. The first loan specialist pre-approved me, telling me that I could use 75% of the monthly rent as income. The 2nd loan officer told me that this was completely false - and that I would have to have the unit rented for 2 years before I could use the rent as income..........which completely screws up my debt ratios. Which person is correct? Can anyone help? Thank you!

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, ,
Sat Dec 3, 2011
Ktbailey - yes that is correct.
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Ktbailey, Home Buyer, Crystal Lake, IL
Sat Dec 3, 2011
So to clarify:

"If it was your primary residence, then after you have reported the rental income on your tax returns then it can be used as rental income without having to have 25% equity or moving to a new area not within commuting distance - so that situation wouldn't apply until you have filed your 2011 tax returns in a month or two."

1. This was our primary residence, which we just newly rented out 3 months ago.
2. We do not have 25% equity in the residence
3. We are currently living with parents while looking for a house, but planning on moving to an area 10 miles away from the unit we rented out.

To confirm - we will basically need to wait until we file our 2011 tax returns and "officially" report it as income...and we should be good to go for FHA...correct? Or, in the paragraph above, did you mean to state - "If it was NOT your primary residence". Thanks again for all the advice!
0 votes
Caroline York, Agent, St Petersburg, FL
Sat Dec 3, 2011
I am quoting the following information from the FHA website "Under the rules, rental income may be considered on the first property when the FHA loan applicant is “relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance.” In these cases there must be a “properly executed lease agreement (i.e., a lease signed by the homebuyer and the lessee) of at least one year’s duration” after the new FHA home loan is closed.

FHA guidelines also require “sufficient equity in vacated property”. What does the FHA define as sufficient? “The homebuyer has a loan-to-value ratio of 75 percent or less, as determined by either a current (no more than six months old) residential appraisal or by comparing the unpaid principal balance to the original sales price of the property. The appraisal, in addition to using forms Fannie Mae1004/Freddie Mac 70, may be an exterior-only appraisal using form Fannie Mae/Freddie Mac 2055, and for condominium units, form Fannie Mae1075/Freddie Mac 466.”

To learn more go to http://www.fhanewsblog.com/2011/10/fha-loans-and-rental-income/ and read the entire article. Good luck.
0 votes
, ,
Sat Dec 3, 2011
Good morning Ktbailey,

Shane's answer is spot-on. Here's what I would add to his excellent advice:
1. Check the License of both Loan Officers. http://www.nmlsconsumeraccess.org
Be sure each has a License.

2. On the License page you can see the employment history of the Loan Officer. I'd recommend selecting the LO with the most experience, and that experience should be as a MORTGAGE BANKER not a BANKER.

Note that Loan Officers who work for the evil empire...err...the BIG BANKS...are NOT Licensed. They are only "registered" and as such aren't worth speaking to, IMHO.

Trevor Curran
NMLS #40140
Web Reference:  http://tcurranmortgage.com
0 votes
Joseph Finne…, Agent, Bethlehem, PA
Sat Dec 3, 2011
If you currently live in the property you intend to rent, then I fully agree with Shane. I had this happen a few months ago. They required the owner have a signed lease for someone to rent the property and then they sent an appraiser to the home to ensure it had 25% equity on it. They want to make sure if you face a hardship you have the means to sell the property you are renting out.


Joe Finnerty
Prudential Patt White Real Estate
Lehigh Valley,PA
0 votes
Larry Hines, Agent, Algonquin, IL
Fri Dec 2, 2011
There is a guideline out there that says for you to be able to use rental income from a property to offset the debt, it needs to be shown on 2 years worth of tax returns. This is for a conventional loan.
I had a client get rejected from three different lenders before the last could explain why. The client had an 800+ credit score and money in the bank.
0 votes
, ,
Fri Dec 2, 2011
Was the condo you are renting out your current primary residence? If it is, then it is a "primary residence converted to a rental property", and in order to use rental income in that situation you will need to either have 25% equity or be relocating to a new area not within commuting distance.

If it was your primary residence, then after you have reported the rental income on your tax returns then it can be used as rental income without having to have 25% equity or moving to a new area not within commuting distance - so that situation wouldn't apply until you have filed your 2011 tax returns in a month or two.

If this was another property you owned, and it was not your primary residence, and you just decided to start renting it out, then FHA just would require you to have a rental agreement and some lenders may even want to see you've actually received rent (cancelled rent checks from your tenant, etc.). FHA does not have a requirement for you to have rented a home out for 2 years in order for the rental income to count, if you run into a loan officer who says it does (and it sounds like you did) then they are telling you what is called an "overlay guideline", which is a guideline that their individual bank/mortgage lender imposes that other lenders do not.

I would go back to the first loan officer and ask them to make absolutely sure they can use the rental income, as some loan officers may say they can use it but are unaware their own company has overlay guidelines. The loan officer should either forward you an email they received from an underwriting confirming it's OK, or provide you the section of their underwriting guidelines which says it's OK.

Shane Milne | NMLS #81195 | Lending in all 50 states
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