counting other units rent as income before owning?

Question

I'm wanting to purchase my first rental property as being a 3plex or 4plex but I notice the mortgage may be 60%-75% of my income. i know most places would deny this but, there's some properties that'll say that there's tenants that want to stay that are providing enough rent to cover the mortgage, so is there potential for a loan officer to be more willing to provide a loan seeing that the property is already making income and will continue to (in theory). Either way I'm trying to network with those who are local to me (Portland, OR) and I will be walking into different credit unions near me to directly ask the loan officers; either way I'd appreciate different perspectives.

Zack Karp · Answer

@Athan Seyler to answer your question, yes for the other units that you will not occupy in a 2-4 unit purchase, you use the lesser of the actual gross lease amount or 75% of the gross market rent as determined on the appraisal, EVEN IF THOSE UNITS ARE VACANT.  That rental income figure gets added to your gross income when calculating your debt-to-income ratio.

You have 2 options for a low down payment for 2-4 unit properties, either Conventional Freddie Mac Home Possible (which has income limits) with 5% down, or FHA with 3.5% down.  That's it.  Don't waste your time calling lenders or walking into credit unions, other products do not exist in that space.

The max DTI for HP is 50% (sometimes hard to get approval over 45%) and the max DTI for FHA is 56.99%.  Please be sure to work with a rockstar LO who is looking out for your best interests and getting you into the right product.  Stay away from the banks and call centers.  If you need a referral, PM me and I can hook you up with a rockstar in OR.

Best of luck!

Andrew Postell · Answer

@Athan Seyler the answer here certainly depends on your loan type and loan TRANSACTION.  For example...

If you are using Fannie Mae or Freddie Mac (if you recognize those names) to BUY the property, then they will absolutely use rental income of the property to help you personally qualify for the loan.  Even if the property is vacant, you can still use rental income for the loan.

However, if you are using Fannie/Freddie as a part of the BRRRR method and using them to REFINANCE out of your BUY loan....then they will require a signed lease to count the rental income to help you qualify.

I hope that makes sense how I described those differences.

Now, if you use a commercial loan....then your income doesn't matter at all.  Just the income of the property.  Most will still follow "lease not needed on purchase" and "lease needed on refinance"...but not all.

Anyway, hope this helps.  Thanks!

Josh Chamberlin · Answer

Great reply from @Zack Karp!  I would be happy to make a couple of lender introductions that can outline a roadmap for your purchase. Welcome to Portland!

Natalie Lopez · Answer

The answer really depends on your intention with the home, like for example  if you plan to live on it there are loan programs that will consider the rental potential of the other units, particularly the FHA 3.5%. I think what you are doing now is great, getting as much information you can with different lenders will definitely educate you to make the right decision.

If you need any recommendations on local lenders that are very

knowledgeable on the matter feel free to PM and I'll gladly help :)

Wish you best on this adventure & hopefully you find a home soon.

Zack Karp · Answer

@Lee Burns yes those numbers don't vary from state to state.  I would not suggest to put out tons of requests, you will drive yourself nuts and (usually) will wind up working with an idiot desk jockey who works internet leads which (usually) equals disaster.  I'll PM you about someone in NY that can help you out.

TYFYS and best of luck!

Lee Burns · Answer

@Zack Karp thank you for that awesome post.  I'm assuming those numbers are federally, not for Oregon state only?  Do you know any mortgage brokers or lenders in NY?  I'd like to use the VA Home Loan, but my FICO's around 615.  I'm thinking if I can sweeten a loan request with a few grand to put as a down payment, my chances of approval would be higher.  Or do you think I should just put out requests until I'm accepted?

Athan Seyler · Answer

Thank you all for your responses, it’s very much appreciated. Either way I’ll figure it out, or maybe another opportunity to finance the deal will occur but I’ll start looking/interviewing some lenders from the area and meet with local individuals.

Mathew Wray · Answer

@Athan Seyler

You're on the right track with the advice given here by the lenders...you'll find there are a number of good lenders here in Portland who will help you through the process AND work with you as you navigate the statewide and city wide landlord tenant laws and where they conflict with mortgage rules and regulations. It's a process that is complicated, but doable with the right help by your side.

While not impossible, doing an 203K loan in our current climate is challenging for a multitude of reasons...but it's a nice option to consider for sure!

Best of luck on your journey!

Mathew

Josue Vargas · Answer

Depends.  Most cases the lender will not care if the property is currently making money or not.  Is not yours and you can't count as a source of income.  Also, sometimes, in order to show 100% income from other rental properties they required to show rental income of at least 24 months to consider them.  My experience is, the lender knows I'm buying a rental property, and they assume 75-80% of the LOAN as rental income.  I asked them why, they told me, we know there is vacancy, expenditures, etc., which makes sense until you proof otherwise.

Andrew Postell · Answer

@Athan Seyler sorry, I might have misunderstood what you meant here.  To me "investment property" = property that I don't occupy.  So if you are not going to occupy this property...then you cannot use FHA money.  FHA requires you live in the property.  Now, if you ARE living in the property, I would consider that house hacking, and FHA is fine.

If you are occupying the property, a commercial loan is out totally.  But if you are not occupying, then commercial loan is fine.  I know, a lot of details but these details do make a difference on what is possible or not.

counting other units rent as income before owning?

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