September 28, 2017
In a previous blog post, we discussed the issue of a borrower using projected rental income from the property to be purchased with an FHA mortgage. Some borrowers are interested in purchasing property that they intend to live in as their primary residence, while planning on renting out unused living units in a multi-unit property.
It is reasonable to expect that such a borrower would want to know if she could use projected rental income from that arrangement as “verifiable income” for the purposes of loan approval. Can the borrower reasonably expect a lender to approve of income from this rental situation when calculating the borrower’s debt-to-income ratio?
This is possible in situations that meet FHA loan approval; some scrutiny will be given to a borrower’s rental income history or lack thereof, depending on circumstances.
The lender is required to evaluate whether or not such income can be counted on in the early years of the loan, similar to the reasonable expectation that the borrower’s current job is “likely to continue” for the first few years of the mortgage.
What does the FHA loan handbook, HUD 4000.1, say about those who apply for FHA mortgages who want to use rental income from other properties as part of their gross income or verifiable income? FHA instructions to the lender require a review of tax filings, and also scrutiny of the rental income.
Does the borrower get a profit from that income after property taxes and other expenses? That is an important factor for the lender to consider. Income from the rental unit that simply offsets the expense of owning the property (principal, interest, taxes, and insurance expenses) may not qualify as “income” for the purposes of approving the loan.
What must the participating FHA lender do in order to review projected rental income from other properties when verifying a borrower’s ability to afford an FHA mortgage? Is this realistically possible?
The answer is a qualified “yes”. The lender will need to make sure this rental income meets certain criteria established in HUD 4000.1.
That criteria begins with a standard that defines the basic stance of the FHA on this issue:
“Rental Income from other real estate holdings may be considered Effective Income if the documentation requirements listed below are met. If Rental Income is being derived from the Property being vacated by the Borrower, the Borrower must be relocating to an area more than 100 miles from the Borrower’s current Principal Residence.”
FHA loan rules in this area also require the lender to “obtain a lease agreement of at least one year’s duration after the Mortgage is closed and evidence of the payment of the security deposit or first month’s rent.”
There are certain factors that apply-some of which may include local or regional trends for rental income, and other factors are related to the borrower’s experience as a landlord. We’ll examine those factors in our next blog post.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
Browse by Date: