Confused about how projected rental income for mortgage applicati

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Confused about how projected rental income for mortgage applicati

Severino C.
Member since 2018 · 6 posts · 0 votes

I am planning to sell my house located in Stockton, CA and buy 2-3 single family homes in the Phoenix, AZ area to have better cash flow. I currently rent my house by the rooms, and I have been successfully doing so in the past two years and I want to continue to do the same business model on my next rental properties. I can do a conventional loan for two single family houses with my full-time job, but my wish is to buy three. I will have 20% down payment for three single family homes using my current house proceed once it is sold. Buying three, however, will stretch my DTI. I plan to buy brand new houses; their prices are not much different from old houses plus I get the advantage of not dealing with house repair/maintenance with an old house. When I apply for a mortgage, can I also use projected income that I may get from a new house without rental history? What about from a house that still to be built by a builder? Thanks for the input! I really appreciate it.

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Chris MasonPro Member
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
4y
Originally posted by @Severino C.:

Thank you @Janea Crum and @Chris Mason for the input. So does the requirement depend on what kind of loan you are getting? Or will it differ if you are applying through big banks versus local/small credit unions? I wonder if there is a formal guideline that is being followed. Thanks again for the information!

 Google search "mortgage overlays," post back if that does not answer the question.

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  • Jana Crum
    Realtor · Phoenix, AZ · Member since 2017 · 117 posts · 78 votes
    4y

    Hey, @Severino C. welcome to Phoenix! It might be better to put more down on two homes or save that cash for reserves/maintenance for two new rentals instead of purchasing 3 new rentals and stretching your DTI. I believe that in order to use the projected rental income to qualify for a mortgage, the property must have a rental history. I don't think you'd be able to do that with a newly built property. I hope this helps, feel free to message me if I can be of further assistance.

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    4y
    Originally posted by @Severino C.:

    I am planning to sell my house located in Stockton, CA and buy 2-3 single family homes in the Phoenix, AZ area to have better cash flow. I currently rent my house by the rooms, and I have been successfully doing so in the past two years and I want to continue to do the same business model on my next rental properties. I can do a conventional loan for two single family houses with my full-time job, but my wish is to buy three. I will have 20% down payment for three single family homes using my current house proceed once it is sold. Buying three, however, will stretch my DTI. I plan to buy brand new houses; their prices are not much different from old houses plus I get the advantage of not dealing with house repair/maintenance with an old house. When I apply for a mortgage, can I also use projected income that I may get from a new house without rental history? What about from a house that still to be built by a builder? Thanks for the input! I really appreciate it.

     Yup, you can use projected rental income from the property you are buying. Just make sure you're working with someone local for the mortgage who knows what they are doing, not one of the covid refi churners.

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  • Severino C.
    OP
    Member since 2018 · 6 posts · 0 votes
    4y

    Thank you @Janea Crum and @Chris Mason for the input. So does the requirement depend on what kind of loan you are getting? Or will it differ if you are applying through big banks versus local/small credit unions? I wonder if there is a formal guideline that is being followed. Thanks again for the information!

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    4y
    Originally posted by @Severino C.:

    Thank you @Janea Crum and @Chris Mason for the input. So does the requirement depend on what kind of loan you are getting? Or will it differ if you are applying through big banks versus local/small credit unions? I wonder if there is a formal guideline that is being followed. Thanks again for the information!

     Google search "mortgage overlays," post back if that does not answer the question.

    1Reply
  • Severino C.
    OP
    Member since 2018 · 6 posts · 0 votes
    4y

    Thanks @Chris Mason. Based on what you have mentioned (i.e. overlays), it is my understanding that it does depend to the lender. Therefore, I think the best thing for me to do is get in touch with the local banks and ask for their specific requirements. So I guess it's time to say hello to Phoenix small/community banks. No longer interested with conforming Fannie Mae/Freddie M as I plan to put everything on LLC. Thank you again.

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  • Zach Wain
    Scottsdale, AZ · Member since 2019 · 435 posts · 248 votes
    4y

    @Severino C. - "When I apply for a mortgage, can I also use projected income that I may get from a new house without rental history? What about from a house that still to be built by a builder?"

    On a Rental Purchase, we as a lender can use 75% of the appraisers opinion of market rents for the subject property.  If its for a rental home you already own and that home is on your previous tax returns, we will use your schedule E to determine rental income.  If an existing rental home that was not listed on your recent tax return because it was newly bought or converted, we can use a lease on that property (75% of the lease).  

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  • Severino C.
    OP
    Member since 2018 · 6 posts · 0 votes
    4y

    Hello @Zach Wain , thanks for the reply. I actually plan to buy one of those newly built properties (e.g. KB Homes, Pulte, etc.) and then rent them by the room, so there is no rental record whatsoever. In fact, I was wondering if it is even possible to get an estimate/projected rental if it is a property that is still going to be built. Again, I like new properties because their prices are really not much of a difference from older built homes - which means lot less repair cost. And as I have said, I have been very happy and successful renting by the rooms the past 2 years. I can use my W-2/tax return to buy my next 2-3 properties, but if this is the business model that I would like to adopt in the future, I may not be able to keep using my regular income to acquire more properties. So does an appraiser's opinion apply also to newly built ones or still going to be built properties, am I correct? Thank you so much for the input and I really appreciate it!!

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  • Zach Wain
    Scottsdale, AZ · Member since 2019 · 435 posts · 248 votes
    4y

    @Severino C. - the same appraiser analysis is done for a newly built home or an existing one.  Because you do not actually close your loan until the new home is completed, it is the same analysis.  The appraiser will give you their opinion of market rents, but it is usually based off of normal long term leases in the area.  They will not do a room by room or an AirBnB analysis.  But yes, you can use that rental analysis.

    The confusing part becomes, this only works when the subject property is the purchase property.  So when you go to buy another home, you will need leases in place to be able to count that rental income on a 'non subject" rental property.  Even if its room by room, that is fine, but I highly recommend you get leases in place.  I have seen this done before.  I will protect you.  My 2 cents, 100% get leases signed even if its room by room

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  • Severino C.
    OP
    Member since 2018 · 6 posts · 0 votes
    4y

    Thank you again @Zach Wain , that is extremely helpful. One more follow up question. You mentioned about getting leases from the non-subject properties to use for mortgage application on the next subject property/ies. I plan to do month to month because I found out that it gives the least headache: I give them 30-day notice when I don’t like them and they leave freely whenever they like also after 30-day notice. So my question is: in applying for mortgage, do month-to-month leases carry lesser weight than say 6-month leases on your non-subject properties? I wonder what is the take on this. Thanks again and happy holidays!

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  • Zach Wain
    Scottsdale, AZ · Member since 2019 · 435 posts · 248 votes
    4y

    @Severino C. Most lenders and underwriters prefer longer term leases.  There is not a specific rule against month to month leases that I can find, but some individual lenders may want a longer term.  Lease term is a bit of a gray area in my experience. 

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  • Severino C.
    OP
    Member since 2018 · 6 posts · 0 votes
    4y

    Thanks @Zach Wain. Your comments are extremely helpful! Cheers, -S

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