How to "prove" rental income as income when getting a mortgage...

[Lynsey Staes]

Current property situation... 

1 SFH - no mortgage - cash flow is $366 a month - rented since March 2016

1 SFH - mortgage - breaking even - this was my house before getting married. We turned it into a rental as to keep the equity. I have renters building my equity at this point. Very low interest rate on the loan. So I am okay holding this property and accruing the equity. Rented since Oct 2014.

1 SFH that we live in. We have a mortgage on this one as well....

I work full time, so up until this point my income has covered everything.  We have not exceeded debt to income ratios etc.  Never really had any problems getting approval for a loan and such.  Taxes have been properly filed each year to account for the rental income, however the first house listed has not been shown on taxes yet because we do not file this year's until next April.  

Recently though we went to refinance the loan on our house.  It was a straight up refi.  We did not pull out equity or anything like that.  At the same time as refinancing, we were getting a pre-approval letter for another property (this ended up falling through but leads to my question. ).  When going through the process for both at the same time, naturally the bank had a few questions.  Giving my financials a quick overview, he stated that he was not sure I could get pre-approved based on my income alone that I would have to include the rental income on both properties.  I understand what he was getting at, however not sure what I need to "prove" it so to speak.  The second house listed above was shown on my taxes as income, so in my mind that was proof enough.  I can see how the first could be questioned, since I haven't had to report it as income yet.  The mortgage lender mentioned having signed leases from all renters along with a notarized letter for each property.  I could see that on the first house, because it was reported on my taxes.  But is it necessary on the second property that was listed?

At the end of the day, I am trying to get my financials in line because we are wanting to get a couple duplexes early next year.  One of our leases is going to expire here at the end of month, so I will need to get it renewed.  If in the process of getting it renewed, I need to get something else from my renters I would prefer to request it in one visit.  What other financials from the rentals would be needed?  I have all the expenses and income listed out - but it seems the bank wants "proof" and I am not sure what counts as proof.  

Any advice or help is appreciated.  I do have a meeting set up with a different bank later this week, as after reading some on here I do not think the first bank I selected is necessarily the best fit for what I intend to do long term.  

[Lynsey Staes]

Originally posted by @Justin Fox:

If you have a tax return for the second home, that should suffice.  But they are the lender and can require what they want.  Tenancy-start to date deposits, reserve fund minimums, current lease agreements and etc.  Having said that, my lender only asked for 2015 tax return and previous two months of bank statements.

If your DSCR is >= 1.25 for the properties then the PITI most likely won't go against your DTI. Just learned that recently. I believe the broker told me they only use 75/80% of the gross income from the rentals.

 All ratios seem to be within acceptable limits at this time, I think the question came up with the pre-approval for the next property.  We are still very comfortable and the property will make money, however if just looking at my income it doesn't work out.  If I toss in my rental income, financials work out splendidly again.  

I talked with my CPA and one lender on here, both agreed 75% of the gross income from rentals is all I should use in calculations.  Using that, I am good to go.  My confusion came in with getting documentation to actually prove it.  I have bank records that show the routine deposits from each rental, I have tax docs that prove the income for the one property, I have lease agreements (though one is coming due), I have reserves built up... so I really think I have my bases covered.  

Thanks for the response.  I was hoping I wasn't missing anything....