Rental income requirements recognition for conventional loan

[Ben Kirchner]

I have talked with 3 different traditional mortgage brokers. I have been told different things with proceeding with a conventional loan through them. I'm in North Carolina, and purchasing a a home in this state.

- Lender-1 says I cannot offset the debt on the mortgage of my rental property until I have claimed it on my 2017 taxes.

- Lender-2 says I can offset the debt on the mortgage of my rental property with a signed lease in place, proof of security deposit, and at least 3 months proof of rent payments.

- Lender-3 says I can offset the debt on the mortgage of my rental property simply with a signed lease, nothing else needed.

My question is can this be right? Do different mortgage companies have different qualifiers with their underwriters? The last thing I want is to have a deal fall through because my lender ends up denying a loan when an offer is accepted. Particularly in this competitive market where I'm offering a higher due diligence.

The case with my rental property is I did have it filled with a tenant from March 2017 to current, with a lease that was through May 2018. However, I have evicted that tenant this month. I will likely have the house filled with a new tenant by October 1st. Therefore, if all I need is a lease in place to get a loan, I'll go with lender #3. If this is not the case, I will need to wait until 2018 to purchase a new home under a conventional loan.

All help is appreciated.

[Andrew Postell]

@Ben Kirchner what you are asking is one of the most common questions in lending - "Why am I hearing different things at different lenders?"   The answer here (which isn't very short unfortunately) is that a lender is allowed to put MORE rules on top of the conventional guidelines.  We call these extra rules "overlays".  I know it sounds crazy that lenders would put MORE rules on top of an already complicated loan process but there is a reason....for every investment property you buy your foreclosure rate increases.  Some banks want to limit that increase so they put these "overlays" in place to limit their risk.  Now, please don't hear what I'm NOT saying.  This is a business decision from the bank.  The entry level person you spoke to probably has no idea of these rules so please don't get angry at them about this.  But what you should do is find a bank that has NO overlays!  We do exist out there but it's not so easy to find us because these types of banks are smaller to mid-sized banks.  Banks that are publicly traded on Wall Street are out.  As an investor you should not use these banks under any circumstance.  So you'll have to call around to different banks.  Or maybe go to some investor networking groups in your area.  You can absolutely use rental income when you purchase a property.  Here are the actual Fannie Mae/Freddie Mac rules on rental income:

1.  Purchasing - when purchasing an investment property the rental income can be used to qualify with an appropriate appraisal which has a rental comparison report.  The qualifying rental income will be based on the rental comparison report within the appraisal.  Even if the home is vacant at the time of purchase, rental income can be used in this fashion.
2. Refinancing - refinaning isn't so cut and dry but here are the two scenarios
   1. If the investment property is reported on the previous year tax returns, and those returns show a complete year of income (365-366 days) then the income will be derived from the tax returns
   2. If the investment property was not claimed on the tax returns, or the year was a partial year, and the customer can show just cause as to why (meaning, they just purchased it - so providing the HUD/CD from when they bought it) then an executed lease can be used to qualify rental income. The property does not have to be occupied just as long as the lease is executed. An executed lease means one that is signed by all parties and the security deposit has been made into the customer's account.

If a bank is telling you anything outside of what I just wrote above then they have OVERLAYS.  Find a bank with no overlays for the most flexible lending you can find.

*WHEW*  I know that was a lot so feel free to ask more questions if you need.  Thanks!