Did you know that each agency has different requirements for using rental income from the borrower’s departing residence to qualify? Please see the guidelines below and let us know if you have any questions.
Conventional
Rental income can be considered for qualifying purposes using 75% of the current lease agreement.
Documentation requirements:
- Fannie Mae – Current signed lease agreement
- Freddie Mac - Current signed lease agreement AND documentation evidencing deposit of first month rental payment and security deposit
FHA
- Must be relocating 100 Miles from departure home.
- Appraisal evidencing market rent and that borrower has 25% equity. Does not need to be done by FHA appraiser.
- Executed Lease agreement of at least one year’s duration after loan close.
- Proof of receipt of security deposit or First Month’s Rent.
- Mortgagee must deduct the PITI from the lesser of:
- the monthly operating income reported on Fannie Mae Form 216/Freddie Mac Form 998; or
- 75 percent of the lesser of:
- fair market rent reported by the Appraiser; or
- the rent reflected in the lease or other rental agreement.
VA
If there is no lease the lender may still consider the prospective rental income for offset purposes:
- Obtain a working knowledge of the local rental market from a local real estate agent, and
- the local rental market is very strong
- Rental Income
- When all or a portion of the borrower’s income is derived from rental income, documentation and verification of the income are necessary to determine the likelihood of continuance.
- Verification of Rental Offset of the Property Occupied Prior to the New Home
- Obtain a copy of the rental agreement for the property, if any.
- Analysis using Rental Offset of the Property Occupied Prior to the New Loan
- Use the prospective rental income only to offset the mortgage payment on the rental property, and only if there is not an indication that the property will be difficult to rent. This rental income may not be included in effective income.
- Obtain a working knowledge of the local rental market. If there is not a lease on the property, but the local rental market is very strong, the lender may still consider the prospective rental income for offset purposes. Provide a justification on VA Form 26-6393,Loan Analysis.
- Reserves are not needed to offset the mortgage payment on the property the Veteran occupies prior to the new loan.
- Continued on next page
- VA Lenders Handbook M26-7
- Chapter 4: Credit Underwriting
- 4-17
- Topic 2: Income – Required Documentation and Analysis, continued
- n.Rental Income, continued
- Example [Rental Offset of the Property Occupied Prior to the New Loan]: The Veteran’s current home has a VA mortgage with a monthly PITI payment of $1,000. Bonus entitlement is being used to purchase a new primary residence and the Veteran will rent the previous home for $1,200 monthly upon closing of the new home. The payment of $1,200 can be used to offset the existing mortgage payment, if all the above conditions are met. The additional rent received in excess of the mortgage payment cannot be used as effective income.
- Verification of Rental Property Income
- Obtain the following:
- ·
- documentation of cash reserves totaling at least 3 months mortgage payments (PITI), and
- ·
- individual income tax returns, signed and dated or lender obtained tax transcripts, plus all applicable schedules for the previous 2 years, which show rental income generated by the property.
- If the borrower has multiple properties, the borrower must have 3 months PITI documented for each property to consider the rental income.
- If there is not a lien on the property, 3 months reserves to cover expenses such as taxes, hazard insurance, flood insurance, homeowner’s association fees, and any other recurring fees should be documented for the property(ies).
- Equity in the property cannot be used as reserves.
- Cash proceeds from a VA refinance cannot be counted as the required PITI on a rental property. The reserve funds must be in the borrower’s account before the new VA loan closes.
- Gift funds cannot be used to meet reserve requirements.
- Analysis of Rental Property Income
- Each property(ies) must have a 2-year rental history itemized on the borrower’s tax return.
- Property depreciation claimed as a deduction on the tax returns may be included in effective income.
- If after adding depreciation to the negative rental income, the borrower still has rental loss, the negative income should be deducted from the overall income as it reduces the borrower’s income.
- If rental income will not, or cannot be used, then the full mortgage payment should be considered and reserves do not need to be considered.
- Continued on next page
- VA Lenders Handbook M26-7
- Chapter 4: Credit Underwriting
- 4-18
- Topic 2: Income – Required Documentation and Analysis, continued
- n.Rental Income, continued
- Verification of Multi-Unit Property Securing the VA loan
- The Veteran/borrower must occupy one unit as his/her residence.
- For purposes of determining the VA guaranty, lenders are instructed to reference only the One-Unit Limit column in the FHFA Table “Fannie Mae and Freddie Mac Maximum Loan Limits for Mortgages, located at https://www.fhfa.gov/DataTools/Downloads.
- Verify cash reserves totaling at least 6 months mortgage payments (PITI), and documentation of the borrower’s prior experience managing rental units and/or use of a property management company to oversee the property.
- Analysis of Multi-Unit Property Securing the VA loan (Veteran will occupy one unit as his/her residence)
- Include the prospective rental income in effective income only if:
- ·
- the borrower has a reasonable likelihood of success as a landlord, and
- ·
- cash reserves totaling at least 6 months mortgage payments (PITI).
- If each unit is separate and not under one mortgage, 6 months PITI must be verified for each separate unit.
- Equity in the property cannot be used as reserves to meet PITI requirements. This must be the borrower’s own funds, not a gift.
- Cash proceeds from a VA regular “Cash-Out” refinance cannot be counted as the required PITI on a rental property. The reserve funds must be in the borrower’s account before the new VA loan closes.
- The amount of rental income to include in effective income is based on 75 percent of the amount indicated on the lease or rental agreement unless a greater percentage can be documented (existing property).
- The amount of rental income to include in effective income is based on 75 percent of the amount indicated on the appraiser’s opinion of the property’s fair monthly rental (proposed construction).
- Continued on next page
- VA Lenders Handbook M26-7
- Chapter 4: Credit Underwriting
- 4-19
- Topic 2: Income – Required Documentation and Analysis, continued
- o.Temporary Boarder Rental Income Single Family Residence
- The verification of temporary boarder rental income requires the following:
- ·
- individual income tax returns, signed and dated, plus all applicable schedules for the previous 2 years, which show boarder income generated by the property, and
- ·
- the rental cannot impair the residential character of the property and cannot exceed 25 percent of the total floor area.
- Analysis of Temporary Boarder Rental Income
- Include rental income in effective income only if the borrower has a reasonable likelihood of continued success due to the strength of the local market. Provide a justification onVA Form 26-6393, Loan Analysis.
- PITI reserves are not necessary to consider the income, and all the income may be used in the analysis.