Signed rental contract prior to new mortgage application??

13 Replies

Hey guys! My plan is to rent out my current home and apply for another mortgage loan through my bank and live in the new property as my primary residence... Would having a signed rental contract on my current home increase my chances of getting approved? Would it increase the amount I am approved for? If so, how would I go about doing it so I wont end up homeless while looking for my new home?? Thanks!!! 

Do you have rental income on your tax returns?  You need two years rental income before lenders will consider it when qualifying for a new loan.  If not, you will have to qualify for both loans without considering the rent.  Lenders are wary of "jump and dump" where you buy a new house, claiming you will rent the old one.  Only to let the old one go into foreclosure after you've moved.

they like to see it on your taxes for 2 years.

@Jon Holdman  thanks for the response... I do not have any rental income as of yet. So my best chances of getting financed is to plan on having a larger down payment along with the other good debt:income, credit score, etc... 

@James Wise  Lenders won't appreciate a pre-signed contract for the upcoming year showing evidence  of  future income to aid  me getting financed? 

No. they will not count it towards your income

Sorry, but until you have the two years experience they will ignore any rental income. So the key is going to be to have enough other income to get your DTI below the lender's threshold, including the payments on the existing loan. They won't say it to your face, but they will assume the lease is bogus.

Be sure you understand real rental math. New investors sometime think if the rent is higher than their PITI payment, they're good. That's a start, but it actually needs to be quite a bit higher to even be break even. You will have vacancies, ongoing maintenance, big capital items and you always have a chance of serious tenant problems. If you assume none of those things will happen, you will be in trouble when they do.

Once you have two years experience, the lender will look at rent on the new property. And they do the math on existing rentals differently than your residence. A residence is nothing but an expensive doo-dad, so the mortgage is purely on the liability side. With rentals, if the net rental income (rents, less all actual expenses including mortgage interest, depreciation is usually not included for this calculation) is positive, it helps your DTI. If that's negative, it hurts. For a new rental, the lender will use 75% of rents less PITI to estimate net rental income.

@Nick Dillaha  While the previous posters are correct as a general rule of thumb, I have received financing that counted future rental income as part of my income.  It took some looking, but I did find a small bank willing to do it for a fully-leased property.  My suggestion would be to get in touch with your lawyer or real estate agent, ask who they recommend, then make some phone calls to explain exactly what you are looking to do.

@Jon Holdman  

Quick related question for you.  If you are dealing with a commercial loan on a multi-unit, will lenders in the U.S.A. recognise  the building's revenue  - or discounted amount of the revenue?   Or, will they still expect the borrower to have two years of rental income?

As @Kevin Siedlecki  points out, lenders vary in how they do things.  

@Roy N.  for commercial loans the lender will look at the income from the property.  But they will look at past actual income.  So, if you're buying a building that has a track record, you will probably be able to use that income.  If you're buying an empty building to turn around, then you won't have the track record.  There's a lot more variation in the commercial space than in residential.  Commercial lenders will want experience, too.  If you've never owned a building and are trying to be a $5 million property you're going to have a harder time than if you had a track record with smaller buildings.

If you're thinking of playing in this space you really need to find lenders and discuss exactly how they will underwrite your application.

@Jon Holdman  

Thank-you.  This falls into place with my observations that commercial lending south of the 48th has more similarity to here than one finds with residential lending.

We already play in that space.  I'm just preparing myself for the eventuality that U.S.A. lenders may choose to ignore our operational history here in Canada.

@Nick Dillaha  talk to some local banks. I know of at least a couple in my area that will count 75% of the rental income against the debt.  I just had success last month at a Credit Union.  You have to have a signed lease before closing. 

My experience is that they want rental income on 2 income tax returns before they consider that money as income.  It does not mean you have rented that property for 2 years.  I think they want to know you are an established rental business not an accidental or clueless landlord.

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