How to Figure Rental Income for a Kentucky FHA, VA, USDA and Conventional Mortgage Loans

 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

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.

Utilizing rental income from the previous home to qualify for the new mortgage in Kentucky FHA, VA, Fannie Mae

 Kentucky FHA, VA, and Fannie Mae Conventional Mortgage rules for rental income

Today's borrowers often wish to retain their existing homes when purchasing a new primary residence. Many questions arise about utilizing rental income from the previous home to qualify for the new mortgage. To clarify the guidelines, we've compiled the pertinent information below.

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.

Conventional

• Executed long term Lease which must start prior to first Payment due date.
• Form 72/1007 supporting lease or 2 months receipt of rental income (or security deposit + 1st month)
• 75 % of lesser of lease or market rent will be used to offset PITIA of departure home.  Income above PITIA can only be used if borrower has documented 1 year history of Investment Property Management.  If no prior history, it is limited to zero positive cashflow.

• The following sources outline the general rental income eligibility requirements for conventional conforming mortgages. 

  • Fannie Mae rental income
  • Freddie Mac rental income
  • Calculating rental income
  • Rental income calculation worksheets

VA

• Must provide either a fully executed lease agreement or CMA (Comparative Market Analysis) completed by a real estate agent.
• Must use 75% of the lease agreement amount or 75% reported on the CMA.
• Can only be used to offset PITIA

Joel Lobb  Mortgage Loan Officer

American Mortgage Solutions, Inc.
10602 Timberwood Circle
Louisville, KY 40223
Company NMLS ID #1364

Text/call: 502-905-3708

email: kentuckyloan@gmail.com

http://www.mylouisvillekentuckymortgage.com/

NMLS 57916  | Company NMLS #1364/MB73346135166/MBR1574

KENTUCKY USDA RURAL HOUSING APPROVAL GUIDE FOR A MORTGAGE

Joel Lobb  Mortgage Loan Officer

American Mortgage Solutions, Inc.
10602 Timberwood Circle
Louisville, KY 40223
Company NMLS ID #1364

Text/call: 502-905-3708

email: kentuckyloan@gmail.com

http://www.mylouisvillekentuckymortgage.com/

NMLS 57916  | Company NMLS #1364/MB73346135166/MBR1574

 

How to Qualify For A Kentucky Mortgage Loan

4 Things Required for a KY Mortgage Loan Approval

Understanding Mortgage underwriting guidelines 

  

All lending institutions have different Underwriting Guidelines set in place when reviewing a borrower's financial history to determine the likelihood of receiving on-time payments. The primary items reviewed are the following 5 areas below:

1. Income

2. Debt

3. Credit History

4. Savings

5. Debt vs Income Ratio

Income

Income is one of the most important variables a lender will examine because it is used to repay the loan. Income is reviewed for the type of work, length of employment, educational training required, and opportunity for advancement. An underwriter will look at the source of income and the likelihood of its continuance to arrive at a gross monthly figure.



Salary and Hourly Wages - Calculated on a gross monthly basis, prior to income tax deductions.



Part-time and Second Job Income - Not usually considered unless it is in place for 12 to 24 straight months. Lenders view part-time income as a strong compensating factor.



Commission, Bonus and Overtime Income - Can only be used if received for two previous years. Further, an employer must verify that it is likely to continue. A 24-month average figure is used.



Retirement and Social Security Income - Must continue for at least three years into the future to be considered. If it is tax free, it can be grossed up to an equivalent gross monthly figure. Multiply the net amount by 1.20%.



Alimony and Child Support Income - Must be received for the 12 previous months and continue for the next 36 months. Lenders will require a divorce decree and a court printout to verify on-time payments.



Notes Receivable, Interest, Dividend and Trust Income - Proof of receiving funds for 12 previous months is required. Documentation showing income due for 3 more years is also necessary. Rental Income - Cannot come from a Primary Residence roommate. The only acceptable source is from an investment property. A lender will use 75% of the monthly rent and subtract ownership expenses. The Schedule E of a tax return is used to verify the figures. If a home rented recently, a copy of a current month-to-month lease is acceptable.



Automobile Allowance and Expense Account Reimbursements - Verified with 2 years tax returns and reduced by actual expenses listed on the income tax return Schedule C.



Education Expense Reimbursements - Not considered income. Only viewed as slight compensating factor.



Self-Employment Income - Lenders are very careful in reviewing self-employed borrowers. Two years minimum ownership is necessary because two years is considered a representative sample. Lenders use a 2-year average monthly income figure from the Adjusted Gross Income on the tax returns. A lender may also add back additional income for depreciation and one-time capital expenses. Self-employed borrowers often have difficulty qualifying for a mortgage due to large expense write offs. A good solution to this challenge used to be the No Income Verification Loan, but there are very few of these available any more given the tightened lending standards in the current economy. NIV loan programs can be studied in the Mortgage Program section of the library.

2. Debt

An applicant's liabilities are reviewed for cash flow. Lenders need to make sure there is enough income for the proposed mortgage payment, after other revolving and installment debts are paid.



All loans, leases, and credit cards are factored into the debt calculation. Utilities, insurance, food, clothing, schooling, etc. are not.

If a loan has less than 10 months remaining, a lender will usually disregard it.

The minimum monthly payment listed on a credit card bill is the figure used, not the payment made.

An applicant who co-borrowed for a friend or relative is accountable for the payment. If the applicant can show 12 months of on-time cancelled checks from the co-borrower, the debt will not count.

Loans can be paid off to qualify for a mortgage, but credit cards sometimes cannot (varies by lender). The reasoning is that if the credit card is paid off, the credit line still exists, and the borrower can run up debt after the loan is closed.

A borrower with fewer liabilities is thought to demonstrate superior cash management skills.

Credit History

Most lenders require a residential merged credit report (RMCR) from the 3 main credit bureaus: Trans Union, Equifax, and Experian. They will order one report which is a blending of all three credit bureaus and is easier to read than the individual reports. This "blended" credit report also searches public records for liens, judgments, bankruptcies and foreclosures. See our credit report index.



Credit report in hand, an underwriter studies the applicant's credit to determine the likelihood of receiving an on-time mortgage payment. Many studies have shown that past performance is a reflection of future expectations. Hence, most lenders now use a national credit scoring system, typically the FICO score, to evaluate credit risk. If you're worried about credit scoring, see our articles on it.



The mortgage lending process, once very forgiving, has tightened lending standards considerably. A person with excellent credit, good stability, and sufficient documentable income to make the payments comfortably will usually qualify for an "A" paper loan. "A Paper", or conforming loans, make up the majority of loans in the U.S. and are loans that must conform to the guidelines set by Fannie Mae or Freddie Mac in order to be saleable by the lender. Such loans must meet established and strict requirements regarding maximum loan amount, down payment amount, borrower income and credit requirements and suitable properties. Loans that do not meet the credit and/or income requirements of conforming "A-paper" loans are known as non-conforming loans and are often referred to as "B", "C" and "D" paper loans depending on the borrower’s credit history and financial capacity.

Here are some rules of thumb most lenders follow:

12 plus months positive credit will usually equal an A paper loan program, depending on the overall credit. FHA loans usually follow this guideline more often than conventional loans.

Unpaid collections, judgments and charge offs must be paid prior to closing an A paper loan. The only exception is if the debt was due to the death of a primary wage earner, or the bill was a medical expense.

If a borrower has negotiated an acceptable payment plan and has made on time payments for 6 to 12 months, a lender may not require a debt to be paid off prior to closing.

Credit items usually are reported for 7 years. Bankruptcies expire after 10 years.

Foreclosure - 5 years from the completion date. From the fifth to seventh year following the foreclosure completion date, the purchase of a principal residence is permitted with a minimum 10% down and 680 FICO score. The purchase of a second or investment property is not permitted for 7 years. Limited cash out refinances are permitted for all occupancy types.

Pre-foreclosure (Short Sale) - 2 years from the completion date (no exceptions or extenuating circumstances).

Deed-in-Lieu of Foreclosure - 4-year period from the date the deed-in-lieu is executed. From the fifth to the seventh year following the execution date the borrower may purchase a property secured by a principal residence, second home or investment property with the greater of 10 percent minimum down payment or the minimum down payment required for the transaction. Limited cash out and cash out refinance transactions secured by a principal residence, second home or investment property are permitted pursuant to the eligibility requirements in effect at that time.

Chapter 7 Bankruptcy - A borrower is eligible for an A paper loan program 4 years after discharge or dismissal, provided they have reestablished credit and have maintained perfect credit after the bankruptcy.

Chapter 13 Bankruptcy - 2 years from the discharge date or 4 years from the dismissal date.

Multiple Bankruptcies- 5 years from the most recent dismissal or discharge date for borrowers with more than one filing in the past 7 years.

The good credit of a co-borrower does not offset the bad credit of a borrower.

Credit scores usually range from 400 to 800. Changes to lending standards are occurring on a daily basis as a result of tightening lending standards and can vary from lender-to-lender-- so this information should be considered simply a guideline. For conforming loans, most lenders will lend down to a FICO of 620, with additional rate hits for the lower-end credit scores and loan-to-values. When you are borrowing more than 80%, they typically will not lend if you have a FICO below 680. The FHA/VA program just changed their minimum required FICO to 620, unless you are qualifying a borrower with non-traditional credit. The few non-conforming loan programs that are still available typically require 30% down payment with a minimum FICO of 700 for self-employed and 650 for W-2 employees, and the loan-to-value will change with the loan amount.

Lenders evaluate savings for three reasons.

The more money a borrower has after closing, the greater the probability of on-time payments.

Most loan programs require a minimum borrower contribution.

Lenders want to know that people have invested their own into the house, making it less likely that they will walk away from their life's savings. They analyze savings documents to insure the applicant did not borrow the funds or receive a gift.

Lenders look at the following types of accounts and assets for down payment funds:



Checking and Savings - 90 days seasoning in a bank account is required for these funds. Gifts and Grants - After a borrower's minimum contribution, a gifts or grant is permitted.


Sale of Assets - Personal property can be sold for the required contribution. The property should be appraised, and a bill of sale is required. Also, a copy of the received check and a deposit slip are needed.


Secured Loans - A loan secured by property is also an acceptable source of closing funds.

IRA, 401K, Keogh & SEP - Any amount that can be accessed is an acceptable source of funds.
Sweat Equity and Cash On Hand - Generally not acceptable. FHA programs allow it in special circumstances.
Sale Of Previous Home - Must close prior to new home for the funds to be used. A lender will ask for a listing contract, sales contract, or HUD 1 closing statement.




The percentage of one's debt to income is one of the most important factors when underwriting a loan. Lenders have determined that a house payment should not exceed approximately 30% of Gross Monthly Income. Gross Monthly Income is income before taxes are taken out. Furthermore, a house payment plus minimum monthly revolving and installment debt should be less than 40% of Gross Monthly Income (this figure varies from 35%-41% contingent on the source of financing).


Example

An applicant has $4,500 gross monthly income. The maximum mortgage payment is:

$4500 X .30 = $1350

Their total debts come to:

$500 Car

$20 Visa

$30 Sears

$75 Master Card

----------------

$625 per month.



Remember, their total debts (mortgage plus other debts) must be less than or equal to 40% of their gross monthly income.

$2,800 X .40 = $1800

$1800 is the maximum debt the borrower can have, debts and mortgage payments combined. Can the borrower keep all their debts and have the maximum mortgage payment allowed? NO!

In this case, the borrower, since they have high debts, must adjust the maximum mortgage payment downward, because:

$625 debts

$1350 mortgage
-------------

$1975 - which is more than the $1800 (40% of gross debt) we calculated above.

The maximum mortgage payment is therefore:

$1800 - $625 (monthly debt) = $1175.

Some restrictions apply. Ask for details. Loan decision is subject to satisfactory appraisal and title review and no change in financial condition. This is not an offer for extension of credit or a commitment to lend. Equal Housing Opportunity.
This communication is provided to you for informational purposes only and should not be relied upon by you.

Joel Lobb (NMLS#57916)

Senior  Loan Officer

American Mortgage Solutions, Inc.

10602 Timberwood Circle Suite 3

Louisville, KY 40223

Company ID #1364 | MB73346

Text/call 502-905-3708

kentuckyloan@gmail.com

If you are an individual with disabilities who needs accommodation, or you are having difficulty using our website to apply for a loan, please contact us at 502-905-3708.

Disclaimer: No statement on this site is a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet Loan-to-Value requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines and are subject to change without notice based on applicant's eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over the life of a loan. Reduction in payments may reflect a longer loan term. Terms of any loan may be subject to payment of points and fees by the applicant  Equal Opportunity Lender. NMLS#57916http://www.nmlsconsumeraccess.org/