Using Prjoected Rental income in a purchase

[Joshua Austin]

I am attempting to buy my first investment property but am having a hard time with attempting to use rental income without being owner-occupy. I know there is DSCR loans that base it off the cashflow or the property but as a first time investor they require roughly 35% downpayment. Looking for any tips to get a pre approval while using rental income

[Katherine Blazer]

Hi @Joshua Austin, On primary residence, you can use 75% of the projected rental income on additional units. So if you are looking at a duplex, you can use 75% of the second unit's income to offset the mortgage. If it's a triplex, then the second 2 units and quadplex the additional 3 units. It's a primary residence, so you will need to occupy one of them. This is true of Convention and FHA loans.

When you move into DSCR loans, you are looking at 20% or more down, and you can use all of the projected income to qualify however it will need to cover its expenses, so principal, interest, taxes, insurance, and HOA or property management fees it may have. Your rate and downpayment will depend on your credit score and the additional income the property will produce after the above expenses are taken care of.

[David M.]

@Joshua Austin

Even when purchasing a second/investment home the expected rent schedule can be used to qualify you for a loan.  Its allowed for conforming loans, but not every lender does it for whatever reason.  Just remember that for your dti the calculation will use 75% of the rents (not 75% of your profit) when determining the impact.  The "fixed" costs (taxes insurance) will be counted as part of the expenses.  An "investment" conventional loan generally will required 20% down min.

Only the owner-occupied loans such as a conventional (as low as 5%), FHA (as low as 3.5% ), USDA and VA (as low as 0%) will let you have such low money down.

[Joshua Austin]

Quote from @David M.:

@Joshua Austin

Even when purchasing a second/investment home the expected rent schedule can be used to qualify you for a loan.  Its allowed for conforming loans, but not every lender does it for whatever reason.  Just remember that for your dti the calculation will use 75% of the rents (not 75% of your profit) when determining the impact.  The "fixed" costs (taxes insurance) will be counted as part of the expenses.  An "investment" conventional loan generally will required 20% down min.

Only the owner-occupied loans such as a conventional (as low as 5%), FHA (as low as 3.5% ), USDA and VA (as low as 0%) will let you have such low money down.

I had heard that before from either a podcast I had listened to or a group I had been following. The expected rents would cover the whole PITI of the home with the 75%. That’s why I am trying to find a lender that allows it. 

[Joshua Austin]

Quote from @David M.:

@Joshua Austin

Even when purchasing a second/investment home the expected rent schedule can be used to qualify you for a loan.  Its allowed for conforming loans, but not every lender does it for whatever reason.  Just remember that for your dti the calculation will use 75% of the rents (not 75% of your profit) when determining the impact.  The "fixed" costs (taxes insurance) will be counted as part of the expenses.  An "investment" conventional loan generally will required 20% down min.

Only the owner-occupied loans such as a conventional (as low as 5%), FHA (as low as 3.5% ), USDA and VA (as low as 0%) will let you have such low money down.

Thank you for the response. That is the answer I am getting from a current lender as well and am trying to see if any lenders allow it for a secondary home.

[Katherine Blazer]

Quote from @Joshua Austin:
Thank you for the response. That is the answer I am getting from a current lender as well and am trying to see if any lenders allow it for a secondary home.

Second homes are designed for "personal vacation homes." You will need to qualify for it without using income because it should not be rented 100% of the year. There is a specific tax guideline on this. If you can qualify for it on your DTI, these conventional loans allow you to put 10% down. They do not allow multidoor homes, so no quad, tri, or duplexes.

[Drew Sygit]

@Joshua Austin not sure what you are trying to do based on some of your comments?

Are you trying to buy a rental property, but fraudulently claim as a 2nd home to only put 10% down and get a better interest rate, but want to use the rental income to qualify?

[Joshua Austin]

Quote from @Drew Sygit:

@Joshua Austin not sure what you are trying to do based on some of your comments?

Are you trying to buy a rental property, but fraudulently claim as a 2nd home to only put 10% down and get a better interest rate, but want to use the rental income to qualify?

Drew I’m not trying to do some fraudulent claim I know this is an investment property and will be using a conventional loan with 25%. Was asking the question using 75% of the expected rental income of the property towards DTI but not income even if I am not living there as an owner occupy property.

[Katherine Blazer]

Quote from @Joshua Austin:

@Joshua Austin not sure what you are trying to do based on some of your comments?

Are you trying to buy a rental property, but fraudulently claim as a 2nd home to only put 10% down and get a better interest rate, but want to use the rental income to qualify?

Drew I’m not trying to do some fraudulent claim I know this is an investment property and will be using a conventional loan with 25%. Was asking the question using 75% of the expected rental income of the property towards DTI but not income even if I am not living there as an owner occupy property.

2nd home interest rates are in line with investment loan rates. During 2020 and 2021, there was a significant rate gate, but currently, they are very similar. 

There are 3 types. 
Primary: You need to live in it. They can be 4 doors or less, including condos and townhomes. If you have multiple units in the property, you can use 75% of the income. Lowest downpayment options

Second home: You do not need to live in. But you do need to use it for personal use. Because you are using it for personal use, you cannot use rental income to qualify. Can only be 1 unit properties, condos, or townhomes. 10% down.

Investment: Can be 4 doors or less, including condos and townhomes. 20%+ down. You can use 75% of the rental income to qualify. If you are going for an unconventional loan option, you can use 100% of the rental income. 

[Drew Sygit]

@Joshua Austin ok. 

You typically need the property to be leased out to have a lender recognize 75% of the rental income.

Many nonQM loans will recognize the projected rental income they get from the appraiser, so the property can be vacant at purchase.

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