Does Lender Factor Rents into DTI Ratio on FHA House Hack?

Question

I am awaiting a response from our lender, but figured it couldn't hurt to ask here...

I have a client interested in a tri-plex where they would purchase it via FHA and live in it as a house hack...live in 1, rent out the other two. The property will be vacant at the time of closing.

The property is priced at $375k, which is quite a bit higher than what they usually could afford (about $225K +/-). The mortgage would be about $2300/month, however the 2 other units would provide right at about $2300/month in income...aka live for free!

My question is can the lender factor the potential market rents of the other 2 units into the buyer's DTI ratio or monthly payment to help them afford more house?

Of course the kicker here is they already own a primary residence on a conventional loan (purchased 2 years ago), but that would of course be rented out at the time they move into the tri-plex. Any input is greatly appreciated!

Harjeet Bhatti · Answer

The lender will count 75% income of  triplex.

Rental Income refers to income received or to be received from the subject Property or other real estate holdings.

(2) Rental Income Received from the Subject Property (TOTAL)

(a) Standard

The Mortgagee may consider Rental Income from existing and prospective tenants if documented in accordance with the following requirements.

Rental Income from the subject Property may be considered Effective Income when the Property is a two- to four-unit dwelling, or an acceptable one- to four-unit Investment Property.

(b) Required Documentation

Documentation varies depending upon the length of time the Borrower has owned the Property.

(i) Limited or No History of Rental Income

Where the Borrower does not have a history of Rental Income from the subject since the previous tax filing:

Two- to Four-Units

The Mortgagee must verify and document the proposed Rental Income by obtaining an appraisal showing fair market rent (use Fannie Mae Form 1025/Freddie Mac Form 72, Small Residential Income Property Appraisal Report) and, if available, the prospective leases.

Christopher Phillips · Answer

@Sean Williams

FHA is intended for first time home buyers, or buyers that haven't purchased in the previous 3 years.

Regarding your 2nd FHA residence question: FHA doesn't normally allow for more than one FHA loan per home buyer except for some extenuating circumstances.

Christopher Phillips · Answer

@Sean Williams

If they aren't moving for job purposes, or some other exemptions, they won't be able to use the FHA loan since they purchased a home in the recent 3 years.

You typically need 2+ years of solid rent income on your income taxes before lenders will use the rental income in the DTI calculations. Sometimes you can get a lender to use the $ if you have signed leases, but it will take some research to find a lender that will do it.

To buy the new home, the lender will look a the DTI for both homes since they are living in the first one now without rental income.

They will most likely have to go conventional 25% down for a triplex on the 2nd home, move in, rent out the other units and rent out the previous home.

Harjeet Bhatti · Answer

@Sean Williams your lender will calculate 75% rent of lease agreement. Most of the time they will offset the payment but not use postive  income. You need sign lease agreement,  rental check deposit in your account.

Sean Williams · Answer

@Harjeet Bhatti this is what I am finding out as well from our lender, thank you for the input! Our lender said the appraisal would include a request for the appraiser to do a Fair Market Rent (FMR) analysis of the property and we would be allowed to use 75% of the income as you mentioned above.

The lender also mentioned the possibilities with a conventional loan (which of course would require more down) but we are being told that they will let you do the same thing as it relates to the rent on the duplex/triplex with the 75%, BUT they would also allow us to use a signed lease (plus proof of 1st month’s rent collected) to offset the payment on their current home that they will eventually be vacating. So, if we had a renter lined up we could conceivably wash out some or all of that payment as well…………also calculated at 75% of the lease rate.

Sean Williams · Answer

Appreciate the input! @Christopher Phillips not sure why purchasing a home on a conventional mortgage in the recent 3 years would matter? Theoretically couldn't a buyer apply for a 2nd FHA after just 13 months of occupying their current FHA residence? (another topic).

Anyways, spoke with the lender. They are in fact able to factor in the potential market rents on the other 2 units on the triplex with the owner-occupant living in the 3rd. I am told this is something the appraiser will do. Of course keeping the existing property and renting it does hurt them though since they cannot factor in the rent they will receive from it.

Travis Dawson · Answer

My lender factored in 75% of the leased units rent when determining my DTI when I purchased my duplex. I ultimately did a conventional loan, but she would have done the same for an FHA.

Chris Mason · Answer

Other 2 units of subject property, yes barring overlays.

Departing primary residence, generally no. There is an exception to that, but you didn't describe circumstances that meet it.

Steven D. · Answer

Depends on the lender, but you can find some investor friendly lenders that will work with you. With the original primary purchase you should have no problems using that income if you can get a lease together and two years more than satisfies owner occupied restrictions. Talk to a few lenders and they will explain what they can and can't use.

Does Lender Factor Rents into DTI Ratio on FHA House Hack?

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