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Rental Income .......... When Can It Be Used #1?

By
Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

With the current market conditions where most properties have declined in value since the time that they were purchased.  Many potential Sellers are choosing not to sell their properties until market conditions improve, and instead rent out their current property and purchase another.  However, taking this route is not as simple as it sounds, so Homeowners who are contemplating doing that need to be aware of the financing guidelines before they embark on down that path.

Certainly it is the right of any Homeowner to rent out there property if they choose to, but will they be able to use the rental income from the existing property that they will be renting to qualify to purchase another property?  Both Conventional and FHA Guidelines allow for a Homeowner to rent out their property and use the rental income to qualify to purchase another property, but there are stipulations.

The stipulations for using rental income to qualify for the purchase of another property differ between Fannie Mae (Conventional Loans) and FHA, so I will cover their guidelines in two separate blogs.  In this blog I will provide Fannie Mae's guidelines on the use of rental income.

Currently Fannie Mae does not have a time period for when rental income can be used on a investment property (non-owner occupied).  BUT, and this is a BIG but, many Lenders will not allow the use of rental income, unless the Non-Occupant Homeowner (investor) has two (2) years of managing rental properties.  So it is very important to check with local Lenders, before assuming that the Fannie Mae Guidelines will apply.

Below are the current Fannie Mae Guidelines if the current home is going to be converted from a Principal Residence to an Investment Property:

  • Fannie Mae will permit up to 75% of the rental income to be used towards qualifying for the new mortgage payment if there is documented equity of at least 30% in the existing property.  The documented proof of equity required is usually in the form of an appraisal.
  • Plus 6 months of reserves for Principal & Interest, Taxes & Insurance (PITI) for both properties.   Fannie Mae will allow Lenders to reduce the 6 months reserves to 4 months if there is proof of 30% equity in the existing property.
  • Plus the rental income must be documented with a copy of a fully executed lease agreement, the receipt of a security deposit from the tenant, and proof that the security deposit has been deposited into the Borrower's account.
  • If the Borrower cannot provide proof of 30% equity in the existing property, then the rental income cannot be used to qualify for the mortgage on the new property.
  • Also the 6 months PITI on both properties cannot be from gift money.

In the next blog I will provide the FHA Guidelines if the current home is going to be converted from a Principal Residence to an Investment Property.

 

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 Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

Posted by

George Souto
NMLS# 65149

C (860) 573-1308
CALL 7 Days/Wk
Fax (860) 760-6891

Email Me
About Me
My Blog

I am a Mortgage Loan Officer who can assist you with all your mortgage & refinancing needs in
CT, and RI

I can assist you with your Conventional,
FHA, CHFA, VA, USDA, & 203K loan programs.

I reside in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Haddam. E. Haddam, Higganum, Chester, Essex, Deep River.

 

Comments(13)

Ginny Gorman
RI Real Estate Services ~ 401-529-7849~ RI Waterfront Real Estate - North Kingstown, RI
Homes for Sale in Southern RI and beyond

Excellent post George!  I just went through this with one of my buyers last year and they were put through the ringer on their investment property and all they had in reserve...I'm bookmarking this one.

Feb 25, 2012 05:40 AM
Barbara Altieri
Better Homes and Gardens RE Shore and Country Properties - Shelton, CT
REALTOR-Fairfield County CT Homes/Condos For Sale

George -- I was not aware of 2-yr rental management requirement. Honestly, my head is spinning sometimes with all these rules and stipulations. We need to know them, though. I can always count on learning something from your always informative posts.

Feb 25, 2012 07:55 AM
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Outstanding presentation of the information. Thank you for sharing the post with all of us.

Feb 25, 2012 10:14 AM
Jennifer Fivelsdal
JFIVE Home Realty LLC | 845-758-6842|162 Deer Run Rd Red Hook NY 12571 - Rhinebeck, NY
Mid Hudson Valley real estate connection

George excellent information.  It is true more potential are going this route because they just can't sell their homes at present value.  I like the way you explained how the rental income can apply to a new purchase if the guidelines are followed.

Feb 25, 2012 11:55 AM
Nick T Pappas
Assoc. Broker ABR, CRS, SFR, e-Pro, @Homes Realty Group, Broker/Providence Property Mgmnt, LLC Huntsville AL - Huntsville, AL
Madison & Huntsville Alabama Real Estate Resource

George, you're exactly the reason I tell my buyer clients to consult with a mortgage professional.  I can give them some answers and explanation of financing etc., but the mortgage professionals such as yourself are the guys to go to when you need the details.  Suggested.

Feb 25, 2012 12:14 PM
Al & Peggy Cunningham, Brokers
RE/MAX West Realty Inc., Brokerage - Brampton, ON
Our Family Wants To Help Your Family!

This is a very insightful blog George. It is something we hear quite often,'oh we'll just rent the property out'. Don't think we have a previous management of rental properties stipulation up here but then again, not sure just how much of the rental income, the mortgage company allows as income. Will be checking this out now.

Feb 26, 2012 10:02 AM
Jeff Dowler, CRS
eXp Realty of California, Inc. - Carlsbad, CA
The Southern California Relocation Dude

George

This is such important information, and I think some homeowners may be surprised at the requirements.

You certainly have been providing a wealth of information recently on the issues buyers need to be aware of regarding getting preapproved and qualified for a loan.

Jeff

Feb 26, 2012 11:33 AM
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

George this is a question that comes up from time to time.  I appreciate this post and intend to keep these posts in a file so I can provide this important information to my clients.

Feb 26, 2012 11:43 AM
Ann Hayden 636-399-7544
Berkshire Hathaway HomeServices Select Properties-St. Louis Missouri - Des Peres, MO
SelectAnn.com

George,

This is good information.

Thank you,

Ann Hayden in Wildwood, MO

Feb 26, 2012 11:57 AM
Ritu Desai 703-625-4949
Samson Properties - Chantilly, VA
Northern Virginia,Washington DC & Maryland Realtor

George, this is excellent information. I will going to suggest and reblog.

Feb 26, 2012 11:18 PM
Cheryl Thomson REALTOR Ret Army
United Real Estate DC Metro Region (703.216.5635) cheryltee47@gmail.com - Prince William, VA
Associate Broker in Northern Virginia

George. You did an outstanding job of explaining this. A lot of homeowners do not know the rules. Look forward to reading your blog on Freddic Mac requirements.

Feb 26, 2012 11:26 PM
Peggy Chirico
Prudential CT Realty - Manchester, CT
REALTOR® 860-748-8900, Hartford & Tolland County Real Estate

Hi George - I am just catching up on my blog reading. This is excellent - the best explanation I have seen yet. Thanks for writing this.

Feb 27, 2012 09:46 PM
Inna Ivchenko
Barcode Properties - Encino, CA
Realtor® • GRI • HAFA • PSC Calabasas CA

Last year I had a lot of rentals too, sellers did not want to sell and they could not get a loan to buy. I guess, next year, we'll see a lot of these rented properties for sale. Prices are climbing up in LA area, so it does not have any sense to rent them out.

Nov 18, 2013 08:50 AM