How do lenders count rent from your other properties when buying another?

Question

Have never been quite sure how this works and it's relevant for a current project. Can someone provide a definitive answer as to how lenders count the income from your existing properties when you purchase a new one? Is it 75% of leases, or do they use your last year's taxes? Thanks!

Bill B. · Answer

In my experience it was 75% until I had 2 years of tax returns with rental income. Then it was 100% of current rent and 100% of expected rent on the new property.

Jeff Prow · Answer

Generally will use last years tax returns unless the property was purchased this year. If that is the case then 75% of the lease.

Stacy Raskin · Answer

If you're doing a conventional loan, many will take 75% of the leases to offset expenses or use your Schedule E. Conventional lenders have guidelines they are supposed to use from the government sponsored enterprises Fannie Mae or Freddie Mac. Lenders can add their own additional requirements called overlays which is why you may hear more than one answer depending on the lender.

If you are doing a DSCR loan, they only look at the property you're buying or refinancing.

DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

How do lenders count rent from your other properties when buying another?

How do lenders count rent from your other properties when buying another?

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