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How Lenders View Rental Income

There are active real estate investors here in the Alpharetta, GA area that do little else but buy, sell and rent real estate. Sometimes they become real estate investors by accident when inheriting a property. Other times, it’s a conscious decision with eyes wide open. But when homeowners begin thinking about buying another home in which to live, they need to consider what they’ll do with their current home. If they need the proceeds from the sale to help buy their new home, then there is no real decision that has to be made. But if the homeowners do have the resources to buy their next home and have the option of keeping the existing property, how does that affect qualifying for a mortgage to finance the subsequent purchase?

The basic rule regarding counting rental income to help qualify is whether or not the homeowners have experience being a landlord either presently or in the future. If someone has rented out property and managed real estate for at least two years, rental income can be used. If not, then any rental income from the existing property cannot be used to help qualify for the next mortgage. If they have owned rental property for at least two years, then rental income may be used to help qualify. This is especially important if the current home still has an existing mortgage.

The rental income must be above and beyond the expense of the mortgage payment, property taxes and insurance. The lender may also employ a vacancy factor and deduct a portion of the rental income to account for potential vacancies between lease terms. For instance, if the mortgage payment is $1,000, property taxes $100 per month and insurance payment $50, that’s a total of $1,150 per month. If the rental income is $1,500 per month, that’s a net of $350 per month. If there’s a vacancy factor of 25 percent, the qualifying income is then .75 X 350 = $262.50, not $350. It is the $262.50 that may be used to help qualify for the new mortgage.

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