In the US, there are more than 22 million rental properties and the bulk of them are occupied. Real estate rentals are big business, and it’s an area that can significantly increase your gross monthly income. But when it comes time to upgrade your primary residence or add another subject property, mortgage lenders seem to be only interested in calculating your debt to income ratio based on W2s and tax returns. The question you’ll find yourself asking the lender is, “Can I use rental income to qualify for a mortgage?”
For many lenders, the answer is no. But why isn’t rental income calculated into mortgage qualifications, and is there another option?
Why most lenders don’t use rental income to qualify
It’s all about risk. Rental income is seen as riskier than other types of cash flow since it’s so easy for renters to ditch their lease agreement with little to no consequences, leaving you, the property owner, with no potential rental income until you can get a new tenant. In today’s housing market, rental units aren’t staying vacant for long but there are no guarantees. That’s what mortgage lenders want – a guarantee.
That leaves landlords in a tough situation. Renting out real estate, especially multi-unit properties, provides income for the owner that’s more stable than a full-time job. Although the net cash flow is more than enough to service the additional mortgage requests, the allowances to write off any expenses related to rental income at the end of the tax year often make it appear much less lucrative.
While it’s not impossible, it’s tougher to qualify for a mortgage with Fannie Mae and Freddie Mac criteria than a private residence where you’ll live.
Is there an option to qualify for a mortgage with rental income?
There is! MBANC specializes in mortgages for self-employed borrowers and investors, and real estate investors are certainly included. For real estate purchase transactions up to $3 million, MBANC offers DSCR loans that can include the rental income most lenders won’t.
The criteria for a rental income mortgage include a few key factors:
- Demonstrable history of rental property ownership and management.
- A credit score of 680 or higher.
- A minimum of 6 month’s reserves.
- And a maximum LTV of 75% on purchases or 70% of cash-out refinances.
Flexibility is ensured with options including mortgage interest-only possibilities and financing for multi-unit properties including non-warrantable condos and condotels.
If MBANC can verify that you can service the mortgage payment and meet the criteria, there’s a good chance we can approve your application for a rental income mortgage. Let us help you secure a mortgage or refinance on a rental property. Contact us today to find out more.