I'm making it easier for everyone to understand how the mortgage process works! As part of my brand new "Ask the Underwriter" feature, I'll be posting your questions and my answers each week. Want to see your question featured? Submit a question in the comments section of this post, tweet at us, or post on Reddit.
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. Game Changer, right? Check out this week’s Q&A to learn how!
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?
Thanks again for answering all these questions!
You can use the expected rental income to offset the monthly mortgage payment of the property you are buying!
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 either; for a one-unit property: Single-Family Comparable Rent Schedule (Form 1007), or 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.
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.
Just think… 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.
Did this help? Find more answers to underwriting questions here.