Dropping 2 year requirement for qualifying rental income

6 Replies

Hey all, I have a question about the requirement that necessitated 2 years of rental history to be shown before allowing that rental income to qualify for a conventional loan.  I may be misstating this, but I think that is the gist of it. 

I have heard recently that this requirement has become less stringent, and that lenders are qualifying borrowers without a rental history, but only for 75% or so of the rental income.  Is there any truth to this? If so, can you point me towards a source?

My lender has asked his underwriters about it and weren't able to find anything about it in the FNMA and FHLMC guidelines so I am wondering if it is even true.

This is for a conventional loan for a private residence my wife and I are trying to qualify for.  We are putting our current condo up for rent without a rental history.

Thanks

Nate

It will depend on the lender and on the property.

Yesterday a mortgage officer from Bank of America told me they want to see only one year worth of rent to be counted

@Nathan W.  

You can use 75% of a lease if it's the first year and the property is not yet showing up on the Sch. E of your federal tax returns.  After that you can still use the income in year 1 it will just depend on what your claiming on the Sch. E.  Here's a hint, your CPA is going to tell you to write everything off and take a big loss, that's fine as along as you don't plan on buying any more property's, or make a lot of money.  If not, the lender has to count that loss against your yearly income which causes many investors not to qualify in the future.  It's normally worth paying a little more in taxes now to make money in the future.

I'm not sure whether it's an overlay or a guideline but the recent lenders I've spoken with about this have said you need at least 30% equity in the home you are moving from in order to count projected rental income for that property.

I believe Freddic Mac requires one year of income while Fannie Mae requires two. Depends on the lender as some lenders have higher overlays and may not allow you to do so.

@Matt Morgan  

You are correct about the equity rule.  I missed the part that @Nathan W.  

mentioned he was going to rent his current primary. For Conventional you need 30% equity in the home your renting, FHA 25%

@Leon Yang  Freddie does require a 2 year history.  I do not believe it is a lender overlay because it comes up right in Freddie's LP approval cert.

Originally posted by @Joe Impagliazzo:

@Nathan W.  

You can use 75% of a lease if it's the first year and the property is not yet showing up on the Sch. E of your federal tax returns.  After that you can still use the income in year 1 it will just depend on what your claiming on the Sch. E.  Here's a hint, your CPA is going to tell you to write everything off and take a big loss, that's fine as along as you don't plan on buying any more property's, or make a lot of money.  If not, the lender has to count that loss against your yearly income which causes many investors not to qualify in the future.  It's normally worth paying a little more in taxes now to make money in the future.

I appreciate you making this point and think this doesn't get talked about enough, especially for self-employed people.  Years ago I worked for two partners who used to say "There's numbers and then there's numbers".  It was shorthand for people underreporting their income to the IRS and over reporting it to potential lenders and partners.  I see this with a lot of independent contractors and vendors that I work with.  They make good money, and certainly enough to afford their housing costs, but their tax returns say otherwise.  It's a good idea to have a plan before you just go deducting everything wilynily in order to take a loss for tax purposes.

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