Can Rental Income Help You Qualify For a Mortgage?

February 28, 2000 "I am looking to buy a property that I will occupy part of the year. The rest of the time it will be rented out for a guaranteed amount. Will the lender include the rental income in qualifying me for a loan?" Yes, the lender will include some of the rental income in qualifying you. The amount would be determined by the appraiser, who might take into account the rent guarantee, depending on the guarantor and other factors. The lender in this case will classify the transaction as an "investment" rather than a purchase for "permanent occupancy". Investment loans have higher default rates than loans to permanent occupants, and lenders expect to be compensated for the greater risk. Figure on paying about 1.5 points more. If you tell the lender the loan is for your primary residence or a second home, you won�t be penalized on the price of the mortgage. But in that case, you must qualify without the rental income. I currently own a home that I plan to rent out when I purchase another home. How will the rental income on my first home affect my ability to qualify for the second? The lender in this situation will assume that some part of your rental income (usually 75%) will remain after paying for utilities, maintenance, etc. From this, they subtract the mortgage payment, taxes and insurance. If the difference is positive, they add it to your income in qualifying you for a mortgage on your next home. If it is negative, they add it to your debt service payments. Copyright Jack Guttentag 2002

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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