Can Rental Income Help You Qualify For a Mortgage?

February 28, 2000, Revised August 2, 2011

"I am looking to buy a property that I will occupy part of the year. The rest of the time it will be rented out for a guaranteed amount. Will the lender include the rental income in qualifying me for a loan?"

Under the new rules established after the financial crisis, rental income can be included in qualifying income only as documented in the owner's tax return for at least one year, which means that it cannot help you purchase the house that will generate the income. As a further disincentive, because of the guaranteed rent, your transaction will be classified as an "investment" rather than a purchase for "permanent occupancy". Investment loans have higher default rates than loans to permanent occupants, and lenders expect to be compensated for the greater risk. Figure on paying a premium rate.

If I were in your situation, I would not consider renting out my home but would purchase it as my primary residence or second home. The rental possibility would arise later.

"I currently own a home that I plan to rent out when I purchase another home. How will the rental income on my first home affect my ability to qualify for the second?"

In 2000, I answered this question as follows: The lender in this situation will assume that some part of your rental income (usually 75%) will remain after paying for utilities, maintenance, etc. From this, they subtract the mortgage payment, taxes and insurance. If the difference is positive, they add it to your income in qualifying you for a mortgage on your next home. If it is negative, they add it to your debt service payments.

In 2011, the answer is very different. Because rental income must be documented by a tax return for at least one year, you have to rent out your current home for at least one year before the rental income will help you buy a new home. Where you would live in the meantime I am not sure. Furthermore, the rental income that can be counted is bottom line net - all expenses must be deducted, with the  possible exception of depreciation, which seems to be left to the underwriter's discretion.

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