How to use rental income to qualify for new mortgage

Question

Hello,

I currently rent out a single family home (15 months so far) for $1250 per month and I live with my fiance rent free. I am looking to purchase another single family house to use as my primary residence. Currently my mortgage payment on the house I rent is $700 (PITI) which means I make a profit of $550 per month. How do I qualify for a new mortgage? I make 2,500 per month gross from my job. I am trying to figure out how to calculate the DTI using my rental property. My only debt is $220 student loan payment and the $700 mortgage payment.
If I use 75 percent of the rental income that is $937 (1250x75%) minus the 700 mortgage payment, is a profit of $237. Is that added to my 2500 work income?
The total PITI mortgage of the house I want to buy is $850 per month. I am trying to understand if I Would I qualify for this home?

From my calculations I would add the $237 net profit from the rental income to my 2500 work income for a total monthly income of $2737. Then I would add the mortgage of the house I want to purchase (850) plus my student loan debt of $220 together for a total of $1070. I would then divide the $1070 by my monthly income of $2737 which equals 39% DTI which means I should qualify since it is less that 43%. Is this math done correctly?

Thank you for your time,

Janee Gibson

Elise Marquette · Answer

Lenders will count the rental income, even if you have not had the property for two years. If you have filed taxes on the property, we look at the net rental income and then subtract out the PITI. If you have not filed taxes with the property yet, then lender use 75% of the lease.

Why not just speak with a lender to figure out if you'll qualify or not rather than trying to calculate your DTI on your own? You'll have to talk with a lender at some point so may as well eat the frog rather than spend all day trying to figure out your numbers when the lender is just going to do it anyway

Andrew Postell · Answer

@Janee Gibson you've got some good comments above but you certainly do NOT have to wait 24 months. If any lender requires you to wait to use rental income then we should not use them. But do seek out some lenders in your area and check out this post HERE if you need to find some good lenders.

Dave Spooner · Answer

@Janee Gibson A lot of this depends on the bank with which you're speaking. There are a lot of hard and fast rules, but there are plenty that are more policy and guideline. Some banks (especially local credit unions and smaller financial institutions) are more aggressive in their treatment of income. In my experience, they all seem to count 50-75% of the rental income as income. I have also heard a lot of what Jody mentioned.

Jody Sperling · Answer

One thing you want to consider if you haven't run into it before is that banks won't consider rental income against your DTI until you've rented the property over 2 separate tax returns. It doesn't have to be 24 months, but it does have to appear on 2 consecutive tax returns, otherwise they won't count it.

You can certainly use saved money to lower the overall debt you're requesting, but if you're nearing the top of what banks will consider for DTI, that's something to keep in mind. Best of luck!

How to use rental income to qualify for new mortgage

How to use rental income to qualify for new mortgage

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