Financing a Currently Leased Property

[Derek Hammond]

I am looking to acquire my first property. My personal finances look to qualify me for around $125k. I have about $7k to work with for a down payment. I live in Kansas City, MO and am looking to buy in the area as I would be occupying the property. 

My question is if there are tenants in place in say a four unit, will the loan officer take the rental income into consideration when deciding how much I qualify for? What about potential rental income? Maybe there's a four unit with 2 tenants in place, could I qualify for more than $125k? I'm seeing a few properties in my area that are just out of my price range personally, but when considering the rental income, the math works out. Could I qualify for closer to $200K with the rental income included? 

I've only started working with my local bank and credit unions. Would a portfolio lender be a better option? 

Any advice is appreciated. 

[James Zettelmeyer]

The 75% of gross rental income is correct.  The guidelines allow for this based on either current lease agreements, or, for vacant units, you can request as part of your appraisal a 1007 rent comparison schedule where the appraiser, in addition to determining the value of the property, will complete a 1007 form which basically determines what the vacant unit(s) would rent for based on market comparables.  So if the 1007 says that a particular unit should rent for $1000/month, then you can count 75% of that, even if the unit is vacant.  Key is to find a lender to go with follow the guidelines without overlays.  Generally speaking, your best bet is to search for wholesale lenders (i.e. brokers) as opposed to banks as wholesale lenders exist purely to lend money and nothing else, so as long as it meets the minimum guidelines and its insurable and sellable, then that's all they care about.  Banks tend to be a bit more conservative because they can afford to be since they have other sources of income other than mortgage lending.  This isn't always the case obviously, but generally speaking, a wholesale lender might be your best bet for this situation.  Obviously referrals for a good one are highly valuable. 

 One thing to note is that any income being counted from rent is NOT netted against the proposed mortgage payment.  It is added to your total overall income.  So if you make $3000/month gross and the property rents for $1000/month, they will add $750 to your gross income for a total of $3750.  This will be the total gross income they use to determine your debt ratio against the full proposed mortgage payment and your other current monthly obligated debts.  May not seem like there's a difference, but there is as adding the rent to your income gives you a higher debt ratio (i.e. more conservative) than netting it off the proposed mortgage payment.  Doesn't really matter if you are well qualified, but if you are right up against the limits and you or your loan officer is doing it the wrong way, then it can cause a problem where you are thinking you qualify and you actually don't.  Just keep that in mind.