How much rental income needed to qualify for mortgage?

Question

How much rental income from investment properties is needed for someone to qualify for a mortgage loan if the person has no other source of income? Like say you want to buy a $1 million property with 20% down for example...how much do you need to be getting each month from rental investments to qualify? And do banks look more at net rental income you get each month (minus all expenses), or do they only care about the checks you get in the mail each month?

Also as a separate but related question, can you get a cash out refinance if you own a property free and clear, but only have income from rental investments? Is this harder to do than getting a regular mortgage loan? And does it make a difference in difficulty if the property is a commercial multifamily (5+ units) versus a residential?

Heather Easterbrook · Answer

With a conventional residential (1-4 unit) mortgage, typically, 75% of rental income counts towards DTI.

You can do a cash-out refi on rentals, usually, 70-75% max LTV.

When DTI is an issue, you can get a non-conventional loan. Qualification is based on the property and cash flow, DSCR (debt service coverage ratio). DTI is not considered.  These loans are available for residential and multifamily (5+ units) properties.

Jerry Padilla · Answer

@Aubrey Cook

You would have to go with a portfolio or commercial loan that looks at the cash flow of the property versus your personal income. Rates will be higher than conventional, but if you can’t show income it is the next best route to go.

@Arthur Neves

If you have W2 income that high, I would look into the conventional route first and if you aren’t able to qualify than look at portfolio or commercial loans.

Arthur Neves · Answer

@Jerry Padilla

Thanks for the answer. If I buy a new property under the corporation name (deed, hud,etc will be under the Inc.), and take a mortgage to pay for that. Can that mortgage be a loan to the corporation, if my personal name is as a guarator?

Is that possible, or the bank will want my personal name to own the property as that will be the collateral for the mortgage?

Jerry Padilla · Answer

@Arthur Neves

Conventional financing won’t allow an LLC and it will have to be in your personal name. You can go portfolio with an LLC, but rates won’t be as favorable.

John Bianco · Answer

@Aubrey Cook

Let’s call it 25% down (80% LTC is a stretch, 75% is pretty standard).

That means $750k loan. You’d have to then ballpark interest rate/amortization based on asset type and location.

For arguments sake, let’s say 4.5% on a 30 year amortization. That means your annual debt service will be $45,602. Now apply a 1.25x DSCR. That means your NOI must be greater than $57,003

So to answer your question, yes, the bank is interested in seeing your net operating income.

I’m not sure I understand the next question entirely. Yes, you can take out a mortgage on a property you own free and clear but no, income from other properties will not be used to underwrite that property. If you’re not going to cross-collateralize, the bank is not going to underwrite your income from other investments.

In this scenario, is the property you own free and clear operating at a loss? If so, why would you want to take debt on a property that cannot support it?

Disclaimer: My answers are only speaking to commercial real estate. I’m not experienced in residential.

Chris Mason · Answer

It works out to 2.5x. That's not a guideline, it's just a product of the math specified in the guidelines.

Once your net rental casfhlow is 2.5x your personal housing expense + all consumer debts, you can carry on getting Fannie loans without any other source of income. The Fannie Mae calculation of your rental cashflow will be based in part on your tax returns, with things subtracted out and added back to arrive at your actual net cashflow.

If you are buying a primary residence, the 2.5x thing continues to apply, with the new property's PITI being your new personal housing expense.

Dan Gamache · Answer

@Aubrey Cook with a Private Lender they will look at the cash flow of the subject property to qualify for a loan. For a 1-4 unit lender usually wants a 1.3 DSCR (debt service coverage ratio) so if your monthly payment (Principal + Interest + taxes + insurance) is $1000 you would need $1300 gross rents $1300/1000= 1.3 DSCR. You can get 30 year products (fixed or adjustable).

For a MultiFamily they will take Annual Gross Rental income less annual operating expenses, property mgmt fee, taxes and insurance divided by annual debt service. Usually looking for a 1.2 DSCR. Usually looking at a 24 month interest only balloon on these deals. The thinking that once you purchase get rented, updated ect, you'd be able to refi with local bank.

You can cash out refinance a multifamily, usually capped around 50-60 LTV. 1-4 unit can go as high as 80LTV.

Curtis Bidwell · Answer

@Aubrey Cook  several variables here.

Are you buying commercial (5+ units) or residential?

How long have you been “in the business”?

$75% is a good rule of thumb for sfr and for those who don’t show rental income for at least 2 years. After 2 years it’s just actual income.

On commercial they have what is called Debt Service Coverage Ratio.  Basically, after expenses you will need to show 1.25x income to the mortgage payment.

There are other considerations but this gives you a good starting point.

Stephanie P. · Answer

@Aubrey Cook @Arthur Neves

Make your life easy and go with a portfolio loan that doesn't require income verification.  It's a little more expensive, but certainly easier.

Arthur Neves · Answer

Very good questions. I was going to post a similar post asking those.

My situation is very similar and I want to explore my options to grow my business, my situation:

- Have 3 properties under an Inc, all paid in cash. 2 are long term rentals and one is a STR.

I want to expand my business and refinance my portfolio, maybe the STR as it is worth ~$400k, and pay 20% down on other 3 or 4 properties. I wonder if I am likely to get some mortgages under my Inc with the income I can show there.

Side note: I have a full-time job, and can show a W2 income of more than $160k/year. Wondering if that helps to get the mortgage under my Inc, or if they will not consider my personal income.

Thanks all

How much rental income needed to qualify for mortgage?

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