Jim Quist is the President and Founder of NewCastle Home Loans. Jim has worked in the mortgage industry for over 20 years. His goal is to help home buyers find the information they need to close on their home purchase with confidence.
You may not know this, but you can use projected rental income to qualify for a mortgage on a new property you're looking to buy and lease out. Any supplemental income helps when you're qualifying for a mortgage. For many, it's the difference between being approved for a loan or denied. Our underwriters answered this question exact question from one of our borrowers not too long ago.
"I'm looking to buy an investment property in the next couple of weeks and rent it out, can I use the future rental income to qualify for the mortgage? Do I need to find a tenant and have a written lease agreement? What is the percentage of the potential rental income I can use?"
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 for an investment property or one you plan on living in.
The market rent is determined by the appraiser, not by the amount on a lease (you don't even need a lease or renter in place). The appraiser 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 (as determined by comparable rental properties in the area) for the subject property on this form.
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 an example:
Market Rent: $1,000 x .75 = $750.
If the monthly PITI 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.
More questions? Ask away!
We know everyone's situation is different. When you're factoring in market rent, the location of the property is exceptionally critical. Feel free to leave us a comment below about your own situation, and our team of home loan experts will answer any questions you have. We've closed many home loans that included future rental income - you can trust our expertise.
Also, if you're still early in your home search, remember to download our step-by-step First-time Home Buyer's Guide to Buying a Home! If you have a game plan going into your home buying journey, you'll know exactly what kind of home you can afford and avoid costly mistakes.