How to Use Rental Income to Qualify for a Mortgage

Using rental income to qualify for a mortgage is a bit more complicated than using wages from employment, but it is possible in many cases. And it’s worth the effort to understand the process of claiming rental income for a mortgage when you want to invest in rental properties. You need to learn how a loan officer views your rental income for mortgage underwriting purposes and know what information and documentation to provide with your mortgage loan application.

Let’s discuss some of the most common questions we get about using rental income to qualify for a mortgage. We’ll give you the answers you need to help you decide if claiming rental income for a mortgage is the best option for you.

Can I use rental income to qualify for a mortgage?

In many cases, you can use rental income to qualify for a mortgage as long as you have adequate documentation of the actual income earned (or of the predicted income if you have owned the property for less than a year).

But there are some cases in which you cannot use rental income.

How does a loan officer define rental income?

Rental income is money earned from tenants who occupy real estate you own.

Loan officers make distinctions between:

• Subject property income and income from other properties. If you want to use income generated by the property you wish to finance, this is considered subject property income. The criteria for qualifying rental income will differ from income from the subject property than from other properties you own.
• Actual rental income received and predicted rental income. If you have a history of consistent rent payments, the loan officer can use actual income received to calculate the rental income to qualify for a mortgage. But if you don’t have this documented payment history, the loan officer will need to calculate your qualifying income differently.

How is rental income calculated for mortgage purposes?

Generally speaking, if the property has a history of rental income being paid consistently, and there is no indication that the cash flow would decrease or stop, loan officers will use the income from your tax returns to calculate rental income for your mortgage qualification.

But suppose there isn’t a history of rental income (perhaps because the property is newly acquired or has recently been converted from a primary residence to a rental property). In that case, loan officers will typically calculate qualifying income as 75% of the gross rent on the lease or 75% of the predicted rent reported by a licensed appraiser, whichever amount is less.

What type of loan programs are available to those that want to use rental income to qualify?

You can use rental income to qualify for several loan programs:

• A conventional loan,
• An FHA loan,
• Or a VA loan (but only on a 2-4 unit multi-family property in which you will occupy one of the units as your primary residence).

What best practices should I know about before applying as a rental property owner?

Here are a few tips to help you qualify for a mortgage as a rental property owner:

• Choose a lender that specializes in customer service. As an OVM customer, you get a dedicated loan officer who can review your finances and help you decide which loan type will be most beneficial to you.
• You may be required to carry cash reserves when using rental income to qualify for a mortgage. The amount of cash reserves required depends on several factors including your experience as a landlord, rental income history, credit history, and financial ratios.
• Documentation is key to claiming rental income for a mortgage.

What documentation do I need to provide to show evidence of my rental income earnings?

The documentation required to claim rental income for a mortgage depends on the rental history of the property. In general, if you have owned the property for long enough to have filed an income tax return, your income tax return will be needed as documentation, along with federal tax Form 1007 or Form 1025 as applicable. If there is little or no documented rental history, you will need to provide the signed lease and a Form 1025 showing a licensed appraiser’s opinion of market rental rates.

With so many factors contributing to the requirements for using rental income to qualify for a mortgage, it pays to discuss your options with your dedicated OVM loan officer. Contact OVM Financial at 757-296-2148 for a free consultation. And when you’re ready to apply for your mortgage, you can get started online at ovmfinancial.com/QuickStart.