Using income generated from a property to qualify for FHA loan

New to Real Estate · New York City · Member since 2021 · 5 posts · 2 votes

I recently learned you are able to use potential income generated in a multifamily home to qualify for an FHA loan,I live in an expensive market so this beneficial for me but I don't know exactly how this works. I'd appreciate if someone can explain this to me or point me in the right direction.

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Derek BrickleyBusiness Member

Lender · Ann Arbor, MI · Member since 2021 · 666 posts · 227 votes

Hi Michaela! You can definitely use rental income from the other units to help you qualify. When your chosen lender has an appraisal done on the property, you will get a comparative rent schedule for the other units. You can use 75% of that value to help you qualify (boost your income) or if the other units are currently rented, they will just need a copy of the lease agreements and can use 75% of current rents. This is just to compensate for vacancies, repairs, maintenance, cap ex, really all other expenses you will have from renting those units.

I'm not sure your particular situation, and to see if there is another option better for you, I'd recommend talking to a lender that has experience with investing. If you live in an expensive market you can use Home Possible which is a Freddie Mac product. This does require slightly more downpayment for a multifamily property (5%) but depending on your situation there are some pricing advantages with potentially lower Private Mortgage Insurance. If you plan on acquiring more househacks in the future and you're eligible for this program, I believe this is a great option because you can have 2 Home Possible loans (acquire 2 househacks in 2 years) and then if you decide to get a 3rd househack you would then be able to use the FHA loan. If you use the FHA loan first, you would be unable to get 2 Home Possible loans. Just forward looking :)

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Derek BrickleyBusiness Member
Lender · Ann Arbor, MI · Member since 2021 · 666 posts · 227 votes
3y
Hi Michaela! You can definitely use rental income from the other units to help you qualify. When your chosen lender has an appraisal done on the property, you will get a comparative rent schedule for the other units. You can use 75% of that value to help you qualify (boost your income) or if the other units are currently rented, they will just need a copy of the lease agreements and can use 75% of current rents. This is just to compensate for vacancies, repairs, maintenance, cap ex, really all other expenses you will have from renting those units.
I'm not sure your particular situation, and to see if there is another option better for you, I'd recommend talking to a lender that has experience with investing. If you live in an expensive market you can use Home Possible which is a Freddie Mac product. This does require slightly more downpayment for a multifamily property (5%) but depending on your situation there are some pricing advantages with potentially lower Private Mortgage Insurance. If you plan on acquiring more househacks in the future and you're eligible for this program, I believe this is a great option because you can have 2 Home Possible loans (acquire 2 househacks in 2 years) and then if you decide to get a 3rd househack you would then be able to use the FHA loan. If you use the FHA loan first, you would be unable to get 2 Home Possible loans. Just forward looking :)
[email protected]734-645-7722
Gold Star Mortgage Financial Group548 Reviews
Website View Page
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Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
Get a good lender and they will tell you exactly what you can qualify for.
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Michaela Perez
OP
New to Real Estate · New York City · Member since 2021 · 5 posts · 2 votes
3y
Quote from @Derek Brickley:

Hi Michaela! You can definitely use rental income from the other units to help you qualify. When your chosen lender has an appraisal done on the property, you will get a comparative rent schedule for the other units. You can use 75% of that value to help you qualify (boost your income) or if the other units are currently rented, they will just need a copy of the lease agreements and can use 75% of current rents. This is just to compensate for vacancies, repairs, maintenance, cap ex, really all other expenses you will have from renting those units.
I'm not sure your particular situation, and to see if there is another option better for you, I'd recommend talking to a lender that has experience with investing. If you live in an expensive market you can use Home Possible which is a Freddie Mac product. This does require slightly more downpayment for a multifamily property (5%) but depending on your situation there are some pricing advantages with potentially lower Private Mortgage Insurance. If you plan on acquiring more househacks in the future and you're eligible for this program, I believe this is a great option because you can have 2 Home Possible loans (acquire 2 househacks in 2 years) and then if you decide to get a 3rd househack you would then be able to use the FHA loan. If you use the FHA loan first, you would be unable to get 2 Home Possible loans. Just forward looking :)

Thank you for the informative response! I will look into Home Possible and compare and contrast which option works best for my situation.
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Michaela Perez
OP
New to Real Estate · New York City · Member since 2021 · 5 posts · 2 votes
3y
Quote from @Eliott Elias:

Get a good lender and they will tell you exactly what you can qualify for.

Thank you, I will contact local lenders.
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Mohammed Rahman
Real Estate Broker · New York, NY · Member since 2020 · 2k+ posts · 1k+ votes
3y
Hey @Michaela Perez! Great question on this, and you're right: using the potential rental income towards an approval is super helpful for people to purchase a house in areas like NYC. I'm an investor & realtor, and have used the FHA program (along with having the lender count the rental income) for myself and my clients. Happy to connect and point you in the right direction.
In a nutshell, the lender will look at the total potential rental income of the units in the house (they will also work with your agent to confirm the numbers) and then apply that income towards your monthly Debt:Income ratios. For example, someone who may not meet the DTI (debt to income) requirement on their own W2 income, may qualify as long as the rental amounts are enough to cover what the bank wants to see in terms of a DTI ratio.
I've worked with a few banks I know in NYC that can help you with this, I'll send you a DM.
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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
3y
It's not as magical as sources monetized by clicks/ads will tend to indicate:
IRL each $500/mo block of rent will bump your buying power by about $20k.
So if the other unit generates $1500/mo, it'll bump your buying power by about $60k.
Talk to your loan officer about specific exact numbers particular to your scenario, but it's not going to jump from $20k per $500/mo to $30k per $500/mo.
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Michaela Perez
OP
New to Real Estate · New York City · Member since 2021 · 5 posts · 2 votes
3y
Quote from @Mohammed Rahman:

Hey @Michaela Perez! Great question on this, and you're right: using the potential rental income towards an approval is super helpful for people to purchase a house in areas like NYC. I'm an investor & realtor, and have used the FHA program (along with having the lender count the rental income) for myself and my clients. Happy to connect and point you in the right direction.
In a nutshell, the lender will look at the total potential rental income of the units in the house (they will also work with your agent to confirm the numbers) and then apply that income towards your monthly Debt:Income ratios. For example, someone who may not meet the DTI (debt to income) requirement on their own W2 income, may qualify as long as the rental amounts are enough to cover what the bank wants to see in terms of a DTI ratio.
I've worked with a few banks I know in NYC that can help you with this, I'll send you a DM.
Thank you so much for the thoughtful response!
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Michaela Perez
OP
New to Real Estate · New York City · Member since 2021 · 5 posts · 2 votes
3y
Quote from @Chris Mason:

It's not as magical as sources monetized by clicks/ads will tend to indicate:
IRL each $500/mo block of rent will bump your buying power by about $20k.
So if the other unit generates $1500/mo, it'll bump your buying power by about $60k.
Talk to your loan officer about specific exact numbers particular to your scenario, but it's not going to jump from $20k per $500/mo to $30k per $500/mo.
Thank you, I will ger a jump on speaking with lenders.
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