How do lending institutions view income properties???

Question

Hello BP family!!  I need your help once again.

Question: Do lenders look favorably or negatively at income properties?

Details:  Long story short, I have one rental property (newbie here), and am currently in the market for a primary residence.  I'm worried about whether my income property will negatively impact my creditworthiness.  The rental was purchased using a combination of personal funds and a ULOC, so there's no note on the house, at the moment.  However, I'm strongly considering using a cash-out refi to pay down the ULOC and free up some capital (which would mean carrying a mortgage on the rental unit).

I would think the lender would see the rental in a positive light, since it's an asset.  Anyway, I thought I'd turn to the experts here on BP to help me out on this one.  What do you all think??

Jerry Padilla · Answer

@Brandon Jenkins

@Christopher Brainard

@Scott England

Some great points made here........

If the property isn't on tax returns, 75% of the rental income is used. If the property is on tax returns than the rental income comes from what is shown on tax records. Not all lenders are the same and some have overlays wanting a two year history. Other more investor friendly lenders are able to choose between following either Fannie Mae or Freddie and are able to get through with a proven mortgage or rental history, and don't require a full two year history. DTI's are always considered. There are cash reserves that need to be met for a mortgaged property (6 months for subject, and all MFR and 2 months for other SFR, if less than 4 mortgaged properties)

You can do a cash out refinance and a primary residence purchase at the same time, this only using one credit pull and close on the same day, if you wanted to. You can then use the cash out money towards closing costs, if need be.

All liens on the house private or conventional are considered mortgages and counted in DTI's.

Jerry Padilla · Answer

@Brandon Jenkins

75% of lease agreements or market rents is the best case scenerio when not reflected on tax returns.

Brandon Jenkins · Answer

@Christopher Brainard

@Scott England

@Jerry Padilla

Thank you for your insightful responses!  I apologize for taking so long to reply.

The good news is the property in question cash flows well above the interest only payments on the ULOC.  My lender is also investor-friendly, so that makes things easier.  (My plan is actually to use the refi to purchase a second unit.)

Unfortunately, I haven't owned the rental long enough to claim the income on my tax return.  So I'm a little concerned about that.

Is there anything I can do to offset that as a potential negative?

Christopher Brainard · Answer

@Brandon Jenkins

I think it depends on your personal financial state and that of the rental. Based on my experience, lenders will apply a percentage (~75%) of the rents collected or will calculate the Pro-Forma NOI to cover the expenses of the property. If you're cash flowing more than the cost of the ULOC, its going to be positive. If its less, its going to negatively impact your DTI. I would speak to the lender before you make the decision to take out a mortgage on your rental property. At the very least, a new line of credit is going to provide a small hit to your credit score and they may have an alternative solution or the refi may not be necessary at all to qualify. Depends on your current financial situation.

-Christopher

How do lending institutions view income properties???

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