W2 Income vs Rental Income

[Sean Kuhn]

If I don't have a job, but do have substantial rental income for the last 2 years on my tax returns, will banks(commercial and conventional lenders) still see that income as just as good as w2 income? I've heard they prefer w2 income. What do you guys think?

[Andrew Postell]

@Tyler Crawford wow, 6 years ago!  This has to be some kind of a record.  But this is kind of what Bigger Pockets is designed for - researching subject no matter how long ago they were written.  Now, some things might be different here so I would guide you that DEPENDING ON WHAT LOAN YOU ARE PREQUALIFIED for....will determine how much you can "afford".  Meaning, a Fannie/Freddie type of loan will allow you to use a 50% Debt-to-Income now....although you still might find some lenders are more restrictive...but that's what most will use.

Now, if you are using a "portfolio" or "commercial" type of loan....then it won't matter what your personal DTI is, since they will use the income of the property itself to qualify you. Here's some quick pointers on how these loans are different:

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different.

Fannie/Freddie types of loans will be available everywhere and those rules might change SLIGHTLY between lenders. Portfolio loans can run the gambit. Since each lender controls it’s own money you will have to call around to ALL the banks to learn about all the programs. A mortgage broker will help with this some…but even the best mortgage brokers don’t’ have access to ALL portfolio loans out there.

*WHEW*  Lots to know for sure.  The important thing to do is to speak with a lender that can help you find out which loan fits you/the property better.  And as you become more successful with real estate then the more lenders you will need to know.  I would certainly recommend knowing 4 in the begging.  Anyway, hope all of this helps in some way!

@Brie Schmidt thanks for still being here after all these years!