Requirements for conventional - using income from rental
I was told by one broker today that I wouldn’t qualify for over a certain amount on a property because first time buyers with no landlord experience cannot use the rental income from the properties towards their qualification. Another broker told me this is not the case. The first broker said all banks must adhere to the requirements of conventional loans. This is my first property, I have been living rent free and have no landlord experience. I want to avoid a situation where a lender is telling me I’m prequalified and then there is a hiccup once we get under contract. Is there such a requirement? I am looking at a 4 unit for 400k and the place has 57k annual income. I was only approved for 385 based on my w-2 by broker one but broker two said I would be qualified well into the 500s bc the property has proven income. Which is correct?
Jeff,
Use the Bigger Pockets forum for any and all questions related to an approval and financing guide lines. When it comes to lenders and loan officers there are some seasoned vets and those who work at a call center and know next to nothing. If you are paying rent and are on a lease or giving a check to someone every month. You can in fact use the rents to qualify to help get a higher purchase price approved.
You are smart to be cautious because it will cost you money to start the mortgage process, pay for an appraisal, inspection etc. Then later find out in underwriting that the loan officer did not calculate income correctly or used rents that do not qualify.
You want to ask to see the math to see how are they running the approval it's not just income, and rents it's also what are the annual taxes and annual home owners insurance they are using to qualify. You also have to factor if there is an HOA fee or any annual or semi-annual association dues, in some cases flood insurance.
If they are off on the upfront numbers it changes the DTI and can make or break the deal. On the flip side if they are not using all of your income, overtime, bonuses they could have you approved for less and not offering full approved financing. It can be tough but that is what makes this forum so helpful you have seasoned pro's to help.
If you ever have specific questions feel free to reach out I enjoy helping and talking REI.
Quote from @Jason Wray:
Jeff,
Use the Bigger Pockets forum for any and all questions related to an approval and financing guide lines. When it comes to lenders and loan officers there are some seasoned vets and those who work at a call center and know next to nothing. If you are paying rent and are on a lease or giving a check to someone every month. You can in fact use the rents to qualify to help get a higher purchase price approved.
You are smart to be cautious because it will cost you money to start the mortgage process, pay for an appraisal, inspection etc. Then later find out in underwriting that the loan officer did not calculate income correctly or used rents that do not qualify.
You want to ask to see the math to see how are they running the approval it's not just income, and rents it's also what are the annual taxes and annual home owners insurance they are using to qualify. You also have to factor if there is an HOA fee or any annual or semi-annual association dues, in some cases flood insurance.
If they are off on the upfront numbers it changes the DTI and can make or break the deal. On the flip side if they are not using all of your income, overtime, bonuses they could have you approved for less and not offering full approved financing. It can be tough but that is what makes this forum so helpful you have seasoned pro's to help.
If you ever have specific questions feel free to reach out I enjoy helping and talking REI.
To clarify, I am not paying rent currently (I have been giving cash to a family member but it would be hard to prove). Lender two above is saying we can use the income from the investment property I am about to purchase to increase my approval amount, and lender one is saying we can’t because I don’t have landlord experience and am not currently paying rent. He also said that lender one could put me in a jam bc apparently all lenders have to follow the same conventional guidelines. I just want to make sure that is not true because I want to proceed with lender two but dont want to get caught in a jam.
Use the find a lender option here on BP. Some PMB are not well versed in more nuanced types of lending scenarios. Also be sure you know what their commission is upfront.
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#3 Creative Real Estate Financing Contributor
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Quote from @Jeff Daring:
I was told by one broker today that I wouldn’t qualify for over a certain amount on a property because first time buyers with no landlord experience cannot use the rental income from the properties towards their qualification. Another broker told me this is not the case. The first broker said all banks must adhere to the requirements of conventional loans. This is my first property, I have been living rent free and have no landlord experience. I want to avoid a situation where a lender is telling me I’m prequalified and then there is a hiccup once we get under contract. Is there such a requirement? I am looking at a 4 unit for 400k and the place has 57k annual income. I was only approved for 385 based on my w-2 by broker one but broker two said I would be qualified well into the 500s bc the property has proven income. Which is correct?
The key here is that you do not have a primary housing expense. Because you do not have a housing you cannot count the income from the subject property. IF you were paying rent, you could count the rent on the subject property.
https://selling-guide.fanniemae.com/sel/b3-3.1-08/rental-inc...
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Lender Alabama (#69841), Virginia (#MLO-35815VA), Texas (#323441), Pennsylvania (#64778), Oregon (#323441), Louisiana (#323411), Iowa (#31166), Georgia (#55988), Florida (#LO40080), and Colorado (#100506224)
Lender 1 is correct. Fannie and Freddie guidelines vary a bit on using rental income for subject property investment purchases but both state that you cannot use the expected rental income from the purchase of an investment property since you have no landlord experience and no primary housing expense.
If you were purchasing this 4 unit as a primary residence you could likely use the rental income on the other 3 units as qualifying income.
@Jeff Daring The first broker is correct. Because you are living rent-free, have no housing payment, and no management history, and are buying this as an investment, you will not be able to count rental income to help you qualify, unfortunately. You will have to qualify off your own income.
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Broker CA (#876196)
- Instant Rate Quotes, Inc.
- https://instantratequotes.com
Quote from @Stephanie Medellin:
@Jeff Daring The first broker is correct. Because you are living rent-free, have no housing payment, and no management history, and are buying this as an investment, you will not be able to count rental income to help you qualify, unfortunately. You will have to qualify off your own income.
I apologize for being unclear, I will be living in this property.
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#3 Creative Real Estate Financing Contributor
- Lender
- Dallas, TX
Quote from @Jeff Daring:
Quote from @Stephanie Medellin:
@Jeff Daring The first broker is correct. Because you are living rent-free, have no housing payment, and no management history, and are buying this as an investment, you will not be able to count rental income to help you qualify, unfortunately. You will have to qualify off your own income.
I apologize for being unclear, I will be living in this property.
In that case then you WOULD be able to use rental income .
https://selling-guide.fanniemae.com/sel/b3-3.1-08/rental-inc...
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Lender Alabama (#69841), Virginia (#MLO-35815VA), Texas (#323441), Pennsylvania (#64778), Oregon (#323441), Louisiana (#323411), Iowa (#31166), Georgia (#55988), Florida (#LO40080), and Colorado (#100506224)
Quote from @Jay Hurst:
Quote from @Jeff Daring:
Quote from @Stephanie Medellin:
@Jeff Daring The first broker is correct. Because you are living rent-free, have no housing payment, and no management history, and are buying this as an investment, you will not be able to count rental income to help you qualify, unfortunately. You will have to qualify off your own income.
I apologize for being unclear, I will be living in this property.
In that case then you WOULD be able to use rental income .
https://selling-guide.fanniemae.com/sel/b3-3.1-08/rental-inc...
Thank you! They accepted my offer so I am happy to have this confirmed !