Written by Dani Hernandez on 2021/05/05
Can You use Future Rental Income to Qualify For a Mortgage?
Ask The Underwriter: Can I Use Future Rental Income to Qualify For a Mortgage?
In this edition of "Ask the Underwriter" we break down a post from a current Texas homeowner who has a few questions regarding financing a new property they’re looking to buy and lease out for this summer. Grab a coffee and let's get started.
Can I Use the Future/Expected Rental Income to Qualify for the Mortgage on the Property?
Yes, you can use the expected rental income to offset the monthly mortgage payment of the property you are buying. In fact, you can use that expected income for an investment property or one you plan on living in.
Do I Need To Find a Tenant and Have a Written Lease Agreement Before I Apply?
Regarding the potential rental income the market rent is determined by the appraiser, not by the amount on a lease (you don't even need a lease or renter in place). The appraiser will include one of the following:
- For a one-unit property - Single-Family Comparable Rent Schedule (Form 1007).
- For two to four-unit properties - Small Residential Income Property Appraisal Report (Form 1025) with your appraisal report.
The appraiser will list the fair market rent (as determined by comparable rental properties in the area) for the subject property on these forms.
What Percentage of the Potential Rental Income Can I Use?
Fannie Mae allows you to use 75% of the market rent amount to calculate the subject property's net cash flow. Let's take a look at how this would playout:
Market Rent: $1,000 x .75 = $750.
If the monthly PITI (principal, interest, taxes, and insurance) on the new property is $1,000 and the market rent at 75% is $750, the subject net cash flow would be -$250. Now, only $250 is used when calculating your DTI (debt-to-income ratio) instead of the full $1,000 monthly mortgage payment.
So, what does that mean?
If the market rent is 25% higher than your mortgage payment, you can exclude the entire monthly mortgage payment when qualifying. This can mean the difference between qualifying for a loan or being denied.
Depending on your situation it can be very beneficial to use future rental income when applying for a mortgage on an investment property.