Proving my rental income so I can use it on debt to income ratio?

Question

Hi guys here's my current situation:

I've had my first house for almost a year, I have friends that rent from me (boarders income I believe it's called, because I live in the house myself?).

Not factoring utilities my gross rental income is $1350 per month, PITI is $866, a net of $484 monthly.

My salary is $3000 a month

I also have approx $500 of side business profit per month (probably won't apply to my debt to income ratio).

I also have about $280 a month of student loans.

So, my question is, how can I use my rental income to let the bank give me a loan for a second house?  They say I maxed out on my debt to income ratio, but I'm really taking home a lot more money at the end of each month than when I got approved for my first mortgage.

I've heard something about the bank allowing you to borrow extra if you have history landlording properties.  Do I have to wait for 2 years tax return history to get this benefit?

Thanks for your help!

Chris Calabrese · Answer

I know my lender requires a signed lease agreement, but they don't require any history or proof of payments.  They will use the income (actually 75% of it) immediately after the property is rented.  Most banks will probably want more than that, at least copies of rent checks.  Is it a big national bank or a local bank?  The locals banks will probably be more flexible and work with you based on your history with them.

Do you have your boarders' leases documented or is it an informal arrangement?  If they pay cash, issue receipts, and if they pay by check, make it a habit to make copies of their checks before you cash or deposit them.  If you haven't filed your taxes yet, go ahead and get them in, so the bank can verify your return.

Dave Toelkes · Answer

I am guessing that you do not have a written lease agreement in place.  If this is the case, then the lender will see your arrangement as a month-to-month lease and may not give you any credit for rental income that could stop tomorrow.

Overcome this by having your tenants sign annual lease agreements.

Jon Holdman · Answer

Don't give up after talking to just one or two lenders.  Only a small percentage of lenders are going to really be willing to work with you.  You have to track them down.

Your net is not $484 a month.  You're neglecting a bunch of other expenses, vacancy and capital.  Banks generally take 75% of gross scheduled rents (that is, ignoring any vacancy or discounts) then subtract PITI to estimate the income.  So you're property is making some income, even with your non-paying tenant (you!)  Once you have actual tax returns, they will look at those.  Most lenders will want two years returns, but if you search around you may find one that's more flexible.

I strongly recommend a CPA to help you maximize your deductions and to be sure you're filing correctly with your complex (partial rental/partial residence) situation.  Some percentage of the utilities, for example, should be deductible and some percentage won't be.

Nathan Emmert · Answer

Or talk to smaller banks who are more lenient and will likely simply go by the leases you have in place as documentation of the rent income.  You won't get the same rates but if you can get fixed rates for 5 years that gives you plenty of time to develop your two or three years of tax returns to go fully conventional.  That's what I'm doing.

Dion DePaoli · Answer

You will likely need to have a two year history to count the income into your DTI.  It won't hurt to show them your new tax return once it is done.  Bare in mind they look at present and past income so if you trended up this year, you are still dragging down because last year you didn't make the same money.

If you can defer or pay down or pay off some of your other liabilities your DTI will go down.  For instance if you student loan is being deferred it may not be counted in your DTI.

Asher Anthes · Answer

Yeah, I'm definitely planning on reporting all the income.  I'm filing it any day now.  But will 1 years history be enough to use it on my debt to income ratio?

Steve Babiak · Answer

You'll have to report the income you received from your boarders as income and pay income taxes on that to start ...  Income you don't ever report is undocumented, and the lenders don't like to count undocumented income these days (they were burned by too many liar loans in the past).

Proving my rental income so I can use it on debt to income ratio?

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