This BLOG On Future Rental Income To Qualify Multi-Unit Property Guidelines Was UPDATED And PUBLISHED On October 19th, 2019
Some first time home buyers buy two to four unit multi unit properties as their first home.
- They use one of the units as an owner occupant unit and rent the others for rental income
- Multi unit properties naturally cost more than single family homes
- Loan Limits on multi-unit properties ore higher on government and conventional loans
- Many first time home buyers would need future rental income to meet the debt to income requirements
- Two to four unit properties are considered residential homes
- First time home buyers can qualify for a residential mortgage loan and future rental income can be used
There are future rental income parameters on how lenders will allow as well as restrictions.
Conventional Loans: Down Payment And Future Rental Income
Conventional mortgage lending guidelines for multi-unit mortgage loans require that the mortgage loan borrower have a minimum of 620 credit scores.
- Both Fannie Mae and Freddie Mac require 15% down payment on owner occupant multi-unit purchases
- One important factor with conventional mortgage loans is that conventional mortgage loans are credit score sensitive unlike FHA insured mortgage loans
- The lower borrowers credit scores are, the higher mortgage rates will be
To get the best conventional mortgage rate on a multi-unit property mortgage loan, the borrower needs a credit score of 740 or higher.
Loan Level Pricing Adjustments (LLPA)
Loan Level Pricing Adjustments (LLPA) are pricing hits to mortgage rates due to the following:
- Lower credit scores
- Higher loan to value
- Types of property
- Loan size
Credit Scores Versus Mortgage Rates
Credit Scores is the most common LLPA:
- Then credit adjustments take effect
The credit score grid are as follows:
How To Get The Lowest Mortgage Rates
Those conventional borrowers with credit scores of 740 can expect to pay the best mortgage rates:
- Those with credit scores of 620 will most likely pay the highest rates with conventional mortgage loans
- Many conventional lenders might have overlays where they might require minimum credit scores of 640 or 680
Fannie Mae guidelines mandate minimum credit scores required to qualify for a conventional loan is 620.
Debt To Income Ratios
Debt to income ratio requirements for conventional mortgage loans is normally 31% front end debt to income ratio and 43% back end debt to income ratio.
- However, these debt to income ratio requirements can be extended if you the Automated Underwriting System will accept higher ratios either by DU FINDINGS or LP FINDINGS
- FHA insured mortgage loans debt to income ratios are substantially higher for borrowers with credit scores higher than 620
- FHA caps front end debt to income ratio at 46.9% and caps back end debt to income ratio at 56.9% back end.
For FHA borrowers with lower than a 620 credit score, debt to income ratio caps are lowered to 31% front end debt to income ratio and 43% back end debt to income ratio.
Conventional loan programs require a minimum of a 15% down payment when it comes to qualifying requirements for multi-family residential homes.
- Non-occupant co-borrowers are not allowed on conventional mortgage loans on multi-unit family residential properties
As with future rental income, conventional mortgage loan programs will allow up to 75% of the market future rental income to be used as income in qualifying the borrower.
For example, let’s take a case scenario:
- a current multi-unit property owner has a tenant that is currently paying $1,350 monthly rent
- the tenant has a one year lease
- the appraiser deems that the market rent is only $1,000
- then 75% of the $1,000 or $750 can be used towards future rental income in qualifying the borrower
The actual rental income of $1,350 is not counted even though the current tenant has been paying that amount for many years and has a lease.
Reserves On Multi-Unit Properties
Conventional mortgage loan programs may require reserves depending on which mortgage lender borrowers choose.
- For example, one conventional lender may require six months of reserves, which is six months worth of principal, interest, mortgage insurance premium, homeowners insurance
- Other lenders may require only three months worth of reserves
- Some lenders will require that the multi-unit home buyer have landlord experience in order for future rental income to count towards the income qualification as part of their overlays
- For example, one conventional lender may require two years of landlord experience
While another lender may require a minimum of 12 months landlord experience.
Mortgage Loan After Bankruptcy And Foreclosure
For those who have had a bankruptcy and/or foreclosure, conventional mortgage programs may not be their best mortgage loan program.
- Unlike FHA loans, conventional mortgage loans require a 4 year waiting period after a bankruptcy
- 7 year waiting period after foreclosure in order to qualify for a conventional mortgage
- FHA loans only require a two year waiting period after Chapter 7 bankruptcy discharged date
- The waiting period is two years from the discharge date of bankruptcy to qualify for a multi-unit on VA Loans
- The waiting period is 4 years from the recorded date of foreclosure to qualify for a multi-unit after a deed in lieu and/or short sale on conventional loans
With FHA loans, there is a mandatory three year waiting period from the recorded date of foreclosure, deed in lieu, short sale to qualify for a multi unit loan.
Down Payment And Future Rental Income Requirements On FHA Loans
The Federal Housing Administration, also known as FHA, allow multi unit residential home buyers to puchase a multi unit property with a 3.5% down payment. This is unlike conventional mortgage loan lenders which require a 15% down payment.
- To qualify for a 3.5% down payment FHA loan on a multi-unit residential property, any property that is between 2 to 4 units, the FHA loan borrower needs a 580 credit score
- Need to get an approve eligible per DU FINDINGS or LP FINDINGS
- However, the debt to income ratio for those borrowers with credit scores under 620 is 31% front end debt to income ratio and 43% back end debt to income ratio
- If credit scores are 620 or higher, then the debt to income ratio caps significantly increases to 46.9% front end debt to income ratio and 56.9% back end debt to income ratio
- However, some lenders may have their own overlays decreasing the maximum debt to income ratio caps
- Borrowers with higher debt to income ratios, the best bet is to consult with a direct lender like myself with no overlays
Multi-Unit home buyers looking to qualify for a direct lender with no mortgage overlays on government and conventional loans can contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at firstname.lastname@example.org.
Future Rental Income FHA Loans
The Federal Housing Administration allow 85% of the market rental income to be used as other income in qualifying the mortgage loan borrower’s income.
For example, lets take a case scenario:
- Current multi unit property owner is getting rental income of $1,350 per month
- The home appraiser values the market rent at $1,000 per month
- 85% of the appraisal’s market valuation, or $850, can be used as additional future rental income in qualifying the borrower’s debt to income ratios
Conventional mortgage lenders only allow 75% of the market rental income in rental income that can be used as additional future rental income.
FHA Loans Versus Conventional Loans
There are many more advantages in going with an FHA loan on multi-unit residential properties than conventional mortgage loan programs.
- The first is the lower down payment requirements
- The second is the higher debt to income restrictions
- Another great advantage in going with an FHA loan when purchasing a multi-unit residential property is that the Federal Housing Administration allows non-occupant co-borrowers for those multi-unit property borrowers who need additional income to qualify to meet debt to income ratios
- Conventional mortgage loan programs do not allow the non-occupant co-borrowers period
- The Federal Housing Administration also allows 100% of the down payment to be gifted
- Lenders allow a portion of the down payment to be gifted and the majority of it needs to be the home buyer’s own seasoned funds
UPDATE To Rental Income Guidelines
There has been recent updates on Rental Income Guidelines. Please read this updated article on changes with Rental Income Guidelines.
Borrowers who need to qualify for a mortgage with a direct lender with no overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at email@example.com.
By Gustan Cho