A Beverly Hills Mortgage Broker may allow you to use your rental income as a way to get a mortgage if you are a landlord or an aspiring investor in real estate. It will depend on whether they are able to show proof of income or, if you’re renting a new property, evidence of the potential earnings.

Beverly Hills Mortgage Brokers must follow specific guidelines when making a decision. Learn more about the stipulations and how they can impact your eligibility.

Is rental income considered when applying for a mortgage

In general, rental income is countable when you apply for a mortgage or refinance an investment property. It must, however, be documented properly and adhere to specific guidelines.

Fannie Mae’s guidelines for rental income — one of America’s largest buyers of conforming loan loans — requires that the following criteria be met:

  • It is important to establish that rental income will continue.
  • The property must be a principal residence property of two to four units in which the borrower resides one unit, or an investment property of one to four units

If it is not from the property being finance, rental income from commercial properties owned by the borrower may be acceptable.

  • Income from the principal residence of the borrower, whether it is a separate property or a unit in a multi-unit structure.
  • Vacation homes can generate income

If your property meets these requirements, getting your rental income credited is a simple matter of filling in the appropriate forms and providing the Beverly Hills Mortgage Brokers the necessary documents. Depending on the rental history of the property, you will need to fill out different forms.

What is the acceptable rental income for underwriting purposes?

Lenders will consider your rental income real if you have the property and can prove the income. Underwriters will consider real rental income.

To determine how much income you have proven to be earning from your leases, a bank might look at your tax returns for two years.

Fannie Mae requires that your personal tax returns be sufficient. You will need to file IRS Form 1040 Schedule E. For a business tax return you would fill out the Rental Real Estate Income & Expenses form for a Partnership or S Corporation. This form is also known as IRS Form 8825.

Fannie Mae may also require an appraisal report to determine the property’s value. An appraiser will need to complete a Single-Family Comparable Rental Schedule (Form 1007) if you own a rental property with only one unit.

The Small Residential Income Property Appraisal Report Form 1025 should be completed by the appraiser for properties with two to four units.

What is the accepted amount of predicted rental income for underwriting purposes?

Sometimes, rental income can’t be proven via a tax return. For example, if you just bought the property or you only show a small portion of your rental income on the tax return, it may not be possible to prove that you have any rental income.

In such a case, the rental income could be considered predicted and could be used for underwriting purposes.

It’s all about being able show proof of the property’s potential income.

Lenders will use the projected rental income to calculate the renter’s income if the tenant is a renter. They typically use 75% of your total income. 25% is subtracted for ongoing maintenance and potential vacancies.

The lender will hire an appraiser to inspect the property and compare similar rental prices in the area. This will allow the lender to estimate potential rental income if there is no tenant.

Is it acceptable to predict rental income?

However, it is not always possible to underwrite a predicted rental income. It is possible to have it counted but it may be difficult to document (e.g., if rent was paid in cash). Lenders may request copies of checks to prove that rent is being paid on time.

If the lease’s market value is less than its predicted rental income, it can be difficult to justify the rent. Let’s suppose you offer preferential rent to a friend or relative. It may not be as beneficial as you expected if it is accepted. You would use the rent values in the lease to project your income instead of the market value.

How does rental income work for a mortgage application calculation?

How your rental income is calculated when you apply for a mortgage depends on the documentation that was used to support it.

How does rental income work with federal tax returns

Before calculating qualifying rental income, federal tax returns must be used by the lender to add any expenses (depreciation, interest and homeowners association dues) to the borrower’s cash flow. Nonrecurring property expenses can be added back, provided they are documented.

The income is then averaged over the number of months the potential borrower used this property as a rental unit in the previous tax year.

How do you calculate rental income with appraisals and leases?

The Beverly Hills Mortgage Broker will use a portion the projected income to calculate leases and appraisals. They typically use 75% and 25% for projected vacant spaces.

What does the rental income contribute to DTI?

Lenders will consider your debt-to-income ratio (DTI) when deciding whether or not to approve your loan application. It is simply the sum of your monthly recurring debt divided by your monthly income.

Beverly Hills Mortgage Brokers will typically look for a ratio less than or equal 43%. The better your ratio, however, is.

Let’s take, for example, a $5,000 gross monthly income. Your mortgage payment is $1,000. You also have a $300 student loan payment, $300 car payment, and $200 minimum credit card payment.

This is how the math would look:

($1,000 + $300 + $300 + $200)/ $5,000 = 0.36

Your debt-to-income ratio in this scenario would be 36%.

This calculation is complicated if you have separate investment properties or your primary residence.

You should add your rental income, which is calculated over the amount of rental months that it was used during the previous tax year, to your gross monthly income calculation.

During this time, your monthly debts should include the entire amount of your monthly mortgage payments.

If the income you calculate is not from your primary residence it will only count towards your gross monthly income if it exceeds your monthly mortgage payment.

If you calculate it and it is negative, it will count towards your monthly debts.

What does your rental income do to your cash flow?

The lender will also consider your net cash flow when lending money to rental properties. Net cash flow, in most cases, is calculated by subtracting your income from your expenses.

It’s more complicated in rental situations. Lenders will again take 75% of your rental income before deducting expenses.

If the result is positive, you are in luck. This number is added to your income. It will then be added to your income.

Rental income calculation worksheets

Fannie Mae offers worksheets to help you get an idea of your rental income before you bring your paperwork to a lender.

The worksheet that is most appropriate depends on your property’s type: Are you a primary residence, an investment property, or a commercial holding?

  • Form 1037: Principal residents who own two or more units
  • For up to four properties, use Form 1038
  • Form 1038A: To invest in properties (up to 10 properties).
  • Form 1039: To generate rental income from investment properties for business purposes

How can I use my rental income to get a mortgage?

The process for applying for a mortgage with rental income will, in most cases, be the same as without it.

You should also be prepared to provide additional documentation to support your rental income, and you might need to undergo additional vetting.

Incorporate rental income into your application

Your rental income will need to be presented at the same time that you give your lender the financial information necessary for your application. You should prepare copies of the following documents:

  • Two years of W-2s/1099s
  • Two years of tax returns
  • Pay stubs for the last 30 days
  • For all of your financial accounts including investments, you should receive bank statements every month (at least 2), or every quarter.
  • If you are self-employed, a profit and loss statement
  • A signed copy your real estate purchase contract

If you have a tenant and your tax returns will provide enough information to show your rental income. You will likely be asked for an estimate of your rental income if you don’t have one.

How can lenders verify rental income for your application?

An estimate will not be sufficient to get you approved for loan approval. Beverly Hills Mortgage Broker will verify your income by conducting an appraisal. To determine the projected rental value, an appraisal will be done. This will include a review of similar properties in your neighborhood.

Your Beverly Hills Mortgage Broker might ask for more details. To verify that rent is being paid on-time, your lender might ask for a copy of your lease if you have a tenant.

It is possible that the rental income could be considered income. It is possible to prove your income by providing proper documentation.

Talk to a Beverly Hills Mortgage Broker for advice on the documentation that should be included in your rental situation. Before you give documents to the lender, make copies.