Can I Use Rental Income To Qualify For Multi Unit Property?

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 so many first time home buyers would need the rental income to meet the debt to income requirements.  One to four unit properties are considered residential homes and first time home buyers can qualify for a residential mortgage loan and rental income can be used.  There are rental income parameters on how mortgage lenders will allow as well as restrictions.

Conventional Loans: Down Payment And Rental Income

 

Conventional mortgage lending guidelines for multi unit mortgage loans require that the mortgage loan borrower have a minimum of a 620 FICO credit scores.  One important factor with conventional mortgage loans is that conventional mortgage loans are credit score sensistive unlike FHA insured mortgage loans.  The lower your credit scores are, the higher your mortgage rates will be.  To get the best conventional mortgage rate on a multi unit property mortgage loan, the mortgage loan borrower needs a credit score of 740 FICO or higher.  Then credit adjustments take effect.  The credit score grid are as follows:  740 FICO, 720 FICO, 700 FICO, 680 FICO, 660 FICO, 640 FICO, 620 FICO.  Those conventional mortgage loan borrower with credit scores of 740 FICO can expect to pay the best mortgage rates and those with credit scores of 620 FICO will most likely pay the highest rates with conventional mortgage loans.  Many conventional mortgage loan mortgage lenders might have mortgage lender overlays where they might require minimum credit scores of 640 FICO or 680 FICO.  Fannie Mae mortgage lending guidelines mandates minimum credit scores required to qualify for a conventional mortgage loan is 620 FICO.

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 FHA insured mortgage loan borrowers with credit scores higher than 620 FICO.  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 insured mortgage loan borrowers with lower than a 620 FICO 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 Loans

Conventional mortgage 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 rental income, conventional mortgage loan programs will allow up to 75% of the market rental income to be used as income in qualifying the mortgage loan borrower.  For example, if the current multi unit property owner has a tenant that is currently paying $1,350 monthly rent and the tenant has a one year lease, but the appraiser deems that the market rent is only $1,000, then 75% of the $1,000 or $750 can be used towards other income in qualifying the mortgage loan 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

Conventional mortgage loan programs may require reserves depending on which mortgage lender you choose.  For example, one conventional mortgage lender may require six months of reserves, which is six months worth of principal, interest, mortgage insurance premium, homeowners insurance.  Other conventional mortgage lender may require only three months worth of reserves.  Some conventional mortgage lenders will require that the multi unit home buyer have landlord experience in order for the rental income to count towards the income qualification.  For example, one conventional mortgage lender may require two years landlord experience while another conventional mortgage 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 loan programs may not be their best mortgage loan program.  Unlike FHA loans, conventional mortgage loans require a 7 year waiting period after a bankruptcy and/or foreclosure in order to qualify for a conventional mortgage loan.  FHA loans only require a two year waiting period after a bankruptcy.  The waiting period is two years from the discharge date of a bankruptcy to qualify for a multi unit residential property loan.  The waiting period is 7 years from the recorded date of a foreclosure to qualify for a multi unit residential property loan.  With FHA loans, there is a mandatory three year waiting period from the recorded date of the foreclosure to qualify for a multi unit residential property loan.  You can qualify for a conventional mortgage loan after two years after having a deed in lieu of foreclosure and/or short sale as long as you can put a 20% down payment and have had re-established credit after the deed in lieu of foreclosure and/or short sale.

 FHA Loans: Down Payment And Rental Income

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 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 mortgage loan borrower needs a 580 FICO credit score and get an approve eligible per DU FINDINGS or LP FINDINGS.  However, the debt to income ratio for those mortgage loan borrowers with credit scores under 620 FICO is 31% front end debt to income ratio and 43% back end debt to income ratio.  If your credit scores are 620 FICO 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 FHA loan mortgage lenders may have their own mortgage lender overlays decreasing the maximum debt to income ratio caps.  If you have higher debt to income ratios, then your best bet is to consult with a licensed mortgage broker, like myself, who have relationships with wholesale mortgage lenders that do not have any mortgage lender overlays.  If you are from Illinois, Florida, Wisconsin, California, or Indiana and are looking for a multi unit residential property mortgage lender with no mortgage lender overlays, please contact me at 262-716-8151 or at www.gustancho.com .

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, if the current multi unit property owner is getting rental income of $1,350 per month but the appraiser values the market rent at $1,000 per month, 85% of the appraisal’s market valuation, or $850, can be used as additional income in qualifying the mortgage loan 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 income.

FHA Loans Versus Conventional Loans

There are many more advantages in going with a FHA loan on multi unit residential properties than conventional mortgage loan programs.  The first is the lower down payment requirements and the second is the higher debt to income restrictions.   Another great advantage in going with a FHA loan when purchasing a multi unit residential property is that the Federal Housing Administration allows non-occupant co-borrowers for those multi unit residential property mortgage loan borrowers who need additional income to qualify.  Conventional mortgage loan programs do not allow non-occupant co-borrowers period.  The Federal Housing Administration also allows 100% of the down payment to be gifted.  Conventional mortgage 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.

By Gustan Cho

www.gustancho.com

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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