When can I use rental income for a new loan?

Question

Hi,

I have a townhome that I live in and rent additional rooms.  Can I use this income as part of my income when I apply for another loan?  I bought it in Augusut 2012, so the two year mark is right around the corner.

I figure I'd throw the question out on BP before going back to my orginial loan officer.

Thanks

Jon Holdman · Answer

Lenders can vary somewhat.  Typically they will use actuals from your tax returns for existing properties, once you meet whatever time threshold they have in place.  Savvy lenders will add depreciation back in.  Then they use the 75%*rent - PITI = net rental income for a new property.  For the DTI calculation, if net rental income is positive, it counts toward income and improves your DTI.  If its negative it counts toward the debt payment and hurts your DTI.

Albert Bui · Answer

In his original message he mentioned he bought it in 2012 and is currently living in the property so he most likely won't be depreciating his current property unless he is claiming home office or is renting a part of the property out to boarders/roommates (most dont claim).

Guidelines for vacating from a current primary and using rental income are different than calculation of existing rental income.

Albert Bui · Answer

The correct answer depends on who you're using for financing. If you're using conventional financing you need to document 30% equity in your current primary that you're vacating in order to use 75% of gross rents from the tenant that will be renting your current home.

You can document it by ordering an appraisal which is 450-700 dollars with rent survey attachment to the appraisal or you can sometimes do an AVM - automated valuation model which is usually free or a drive by appraisal with some banks which is usually 100-200 dollars.

Some banks (portfolio non conventional) will all you to use gross rental income either discounted at 75% of face value or full 100% against your full PITIA (current residence) if you put down 20-25% on the new property.

with FHA you can use gross rental income up to 85% of gross against PITIA when looknig to buy a new property assuming your current mortgage is not a FHA loan which you'd then have to adhere to 2nd primary/FHA rules/exceptions.

You can see how these general questions on BP get answered so non nonchalantly however the depth of the answer really depends on your goals, your plans, and financing tools in use, and working with someone who actually understands not only the financing semantics and the investing objectives.

Jon Holdman · Answer

You're correct there.

Don't get married to any particular loan officer.  (Well, if you date, like each other, and things work out, don't let me stop you.)  Different lenders have different programs and rules.  "No" often just means "we can't do that".  Someone else may be able to, so start calling and find lenders in your area that are doing investment loans.  Especially smaller banks and credit unions.  You may find someone who will include the roommate income and might let you use that income even right now.  If you bought in August '12 this income would have been on '12 and '13 taxes so that may be enough for most lenders.  The "two years experience" is typically taken to mean two tax returns.

Ryan VanPatten · Answer

@Jon Holdman @Nick Fitzpatrick I have claimed the rental income from my roommates on my taxes.  I figured it may come back to bite me if I didn't.

I know the question is kind of vague, I just figured I'd put it out there anyways.

Thanks for the replies!  I am going to be speaking to my previous loan officer just to get his explanation as well.

Nick Fitzpatrick · Answer

@Ryan VanPatten

Do you report your roomates payments to yourself on your taxes at the end of the year? If so you will be able to use it for most lenders, some have different formulas for how they figure it out and how long it needs to be documented in your returns.

Jon Holdman · Answer

Oh, @Albert Bui thanks for pointing that out.  Reading @Ryan VanPatten original post I see this is roommate income.  From what others have posted, lenders rarely will include roommate income.

OTOH, if he is renting part of the house there should be income and depreciation reported on tax returns.  Hopefully you have some help from an accountant on your taxes, Ryan.  Complicated situation and rentals are complicated for taxes even with simple situations.

Coty Leon · Answer

If the last two years of tax return show a net loss (because of depreciation etc), does anyone know how it impacts this calculation? Or they take 75% of gross income into consideration?

When can I use rental income for a new loan?

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