Rental income requirements recognition for conventional loan

8 Replies

I have talked with 3 different traditional mortgage brokers. I have been told different things with proceeding with a conventional loan through them. I'm in North Carolina, and purchasing a a home in this state.

- Lender-1 says I cannot offset the debt on the mortgage of my rental property until I have claimed it on my 2017 taxes.

- Lender-2 says I can offset the debt on the mortgage of my rental property with a signed lease in place, proof of security deposit, and at least 3 months proof of rent payments.

- Lender-3 says I can offset the debt on the mortgage of my rental property simply with a signed lease, nothing else needed.

My question is can this be right? Do different mortgage companies have different qualifiers with their underwriters? The last thing I want is to have a deal fall through because my lender ends up denying a loan when an offer is accepted. Particularly in this competitive market where I'm offering a higher due diligence.

The case with my rental property is I did have it filled with a tenant from March 2017 to current, with a lease that was through May 2018. However, I have evicted that tenant this month. I will likely have the house filled with a new tenant by October 1st. Therefore, if all I need is a lease in place to get a loan, I'll go with lender #3. If this is not the case, I will need to wait until 2018 to purchase a new home under a conventional loan.

All help is appreciated.

@Ben Kirchner what you are asking is one of the most common questions in lending - "Why am I hearing different things at different lenders?"   The answer here (which isn't very short unfortunately) is that a lender is allowed to put MORE rules on top of the conventional guidelines.  We call these extra rules "overlays".  I know it sounds crazy that lenders would put MORE rules on top of an already complicated loan process but there is a reason....for every investment property you buy your foreclosure rate increases.  Some banks want to limit that increase so they put these "overlays" in place to limit their risk.  Now, please don't hear what I'm NOT saying.  This is a business decision from the bank.  The entry level person you spoke to probably has no idea of these rules so please don't get angry at them about this.  But what you should do is find a bank that has NO overlays!  We do exist out there but it's not so easy to find us because these types of banks are smaller to mid-sized banks.  Banks that are publicly traded on Wall Street are out.  As an investor you should not use these banks under any circumstance.  So you'll have to call around to different banks.  Or maybe go to some investor networking groups in your area.  You can absolutely use rental income when you purchase a property.  Here are the actual Fannie Mae/Freddie Mac rules on rental income:

  1.  Purchasing - when purchasing an investment property the rental income can be used to qualify with an appropriate appraisal which has a rental comparison report.  The qualifying rental income will be based on the rental comparison report within the appraisal.  Even if the home is vacant at the time of purchase, rental income can be used in this fashion.
  2. Refinancing - refinaning isn't so cut and dry but here are the two scenarios
    1. If the investment property is reported on the previous year tax returns, and those returns show a complete year of income (365-366 days) then the income will be derived from the tax returns
    2. If the investment property was not claimed on the tax returns, or the year was a partial year, and the customer can show just cause as to why (meaning, they just purchased it - so providing the HUD/CD from when they bought it) then an executed lease can be used to qualify rental income. The property does not have to be occupied just as long as the lease is executed. An executed lease means one that is signed by all parties and the security deposit has been made into the customer's account.

If a bank is telling you anything outside of what I just wrote above then they have OVERLAYS.  Find a bank with no overlays for the most flexible lending you can find.

*WHEW*  I know that was a lot so feel free to ask more questions if you need.  Thanks!

Thanks @Andrew Postell for additional information.  I had no idea some lenders would accept expected rent.  One experienced lender here even said she had never heard of a lender acknowledging rental income without proof of rent history.  So in my case of lender-3 - if they have told me all they need is a signed lease in place, that is truly all I need?  It was even said even though I have now evicted the tenant who was on the lease since March 2017, I can still use that lease.  Acknowledging rental income just based off the lease will be huge for me moving forward with Lender-3, as I would otherwise have my hands tied until the next year.  So I'm very pleased to hear what you've shared, Andrew.

I was given a pre-approval letter from Lender-3.  He knows my credit score, income, mortgage debts, rental history, and anything else he has asked.  Therefore, I'm assuming when one of my offers for the next house purchased is accepted, I should have nothing to worry about the funding going through?  I always wonder what happens with a deal doesn't go through as a result of funding not going through.  Are these more than likely someone lying about their income/debt?  If that's the case, I would have nothing to worry about.

@Ben Kirchner if I am following you right, you are looking to purchase a new property but currently have an investment property?  If I have that right, and executed lease agreement is all you will need to use the on the current owned property to use rental income (as long as it was purchased in the past year as to not be on tax returns).  When purchasing your next property you will just need an appraisal on the NEW property to use that income.  I hope this makes sense.  If I have anything incorrect of if you need clarification just let me know.  Thanks!

@Andrew Postell that is correct.  I have an investment property with an executed lease agreement.  I prchased this property in 2017. I only received rent from that property from March-end of July 2017.  While I still have the lease for this, I would be getting a new tenant for this property in October 2017.  A question I would have is - Is the executed lease agreement all that is needed, and this is the case in every state?  Also, when I do claim the rental income on my taxes, I'm told only 75% will be recognized.  Is this 75% of the monthly rent, or 75% of the total rental income I received in the calendar year?

As far as my current primary residence, I do plan to rent it out when I purchase a new primary residence.  However, my lender did say they would need a lease in order to offset debt.  He did not mention anything about an appraisal to offset the debt.  However, this will not be a problem, as I should have a lease in place within a month of finding a new primary residence.  

I really appreciate the help!

@Ben Kirchner those rules are true in every state...but not at every lender (that "overlay" thing again). Lease agreement is all that is needed to show qualifying income on an investment property not included on tax returns.  That 75% rule was not explained properly.  When using a lease the rule is that 75% of the income is used to qualify.  When using the tax returns is a pretty complicated formula.  Just make sure and get prequalified when the time comes to use tax returns and you'll know the score beforehand.

@Ben Kirchner As it looks like everyone else in this thread already said, YES different mortgage companies will have vastly different requirements in my experience.  I've talked to some who have told me "we cannot count any of your rental income until it is on 5 years of tax returns" and I've dealt with others which don't even seem to verify income before handing out a loan.  The most flexible mortgage lenders are usually A) huge nation-wide credit unions (Navy Federal, PENFED, etc.) or B) much smaller local banks.

@Ben Kirchner the term I experienced several years ago was "seasoned" landlord and that meant two years of rental income reported on tax returns. The seasoning period gave lenders the comfort level that the borrower knew enough about the business so the lender would consider 75% of the projected income on the next property as part of the income qualifying for the loan. Good luck.

Ask around and I bet you'll find someone that knows a mid size bank that will fit your criteria. Your in Durham and I'm sure they are there. If you don't have any leads just walk in and ask to speak to a loan officer. I did this to 3 different banks last week and all 3 said bring me your deals! Look professional and act professional and be honest with them. As soon as you walk in the game is on and they are "feeling" you out. When you leave, be sure to follow up with a phone call or email. It's all about relationship. I've got loans with the big banks and yes they will loan and yes you have to go thru all these layers to get the loan. I was eventually told I maxed out so the game is back on! Now I have 3-5 local to mid size banks that will look at anything I bring them. Sounds like your getting started so I my focus would be  Network with banks/investors/CPA's. All of them will guide your correctly and be worth their weight in gold. Yes you'll have some that are crappy but you learn who they are and know not to deal with them. 

Build the relationships with all 3!