Ask The Underwriter: Can I Use Future Rental Income to Qualify For a Mortgage?
In this edition of "Ask the Underwriter," we break down a post from a current Texas homeowner who has a few questions regarding financing a new property they’re looking to buy and lease out for the summer. Grab a coffee and let's get started.
Can I Use the Future/Expected Rental Income to Qualify for the Mortgage on the Property?
Yes, you can use the expected rental income to offset the monthly mortgage payment of the property you are buying. In fact, you can use that expected income for an investment property or one you plan on living in.
Do I Need To Find a Tenant and Have a Written Lease Agreement Before I Apply?
Regarding the potential rental income, you do not need a lease or renter in place. The market rent is not determined by the amount on a lease, but by the appraiser. The appraisal will include one of the following:
- For a one-unit property - Single-Family Comparable Rent Schedule (Form 1007).
- For two to four-unit properties - Small Residential Income Property Appraisal Report (Form 1025) with your appraisal report.
The appraiser will list the fair market rent for the subject property on these forms. This is determined by comparable rental properties in the area.
What Percentage of the Potential Rental Income Can I Use?
Fannie Mae allows you to use 75% of the market rent amount to calculate the subject property's net cash flow. Let's take a look at how this would playout:
Market Rent: $1,000 x .75 = $750.
If the monthly PITI (principal, interest, taxes, and insurance) on the new property is $1,000 and the market rent at 75% is $750, the subject net cash flow would be -$250. Now, only $250 is used when calculating your DTI (debt-to-income ratio) instead of the full $1,000 monthly mortgage payment.
So, what does that mean?
If the market rent is 25% higher than your mortgage payment, you can exclude the entire monthly mortgage payment when qualifying. This can mean the difference between qualifying for a loan or being denied.
Depending on your situation it can be very beneficial to use future rental income when applying for a mortgage on an investment property.
Can I Use Future/Expected Rental Income to Qualify for the UpEquity Buy with Cash Program?
Yes, you can! The UpEquity Buy with Cash program allows you to go to market with cash in hand and, like a traditional mortgage, you can use that expected rental income to qualify. Whether for an investment property or one you plan on living in, the expected rental income can be very beneficial in lowering your DTI and getting approved for a cash mortgage.
If you’re looking to make a cash offer on your next real estate investment, get in touch with one of our cash mortgage experts.