Welcome to part 2 of 3 of “How to handle any rental income” series. In case you missed the first installment you can catch up by clicking this link “How to Handle Any Rental Income Part 1”
As a quick recap this three-part blog broken down into these topics in regards to rental income.
- Rental income from a 2-4 Unit primary residence
- Rental income from the subject property
- Rental income from non-subject properties (including when the borrower’s business owns a property)
The best way to review rental income for a subject property is to break the examples up between purchase transactions and refinance transactions. The examples below are for conforming loan and follow the guidelines published in FNMA and FHLMC guidelines (quoted below).
Rental Income From Subject Property
Example 1
Purchase of any 1-4 unit rental property where there is no current active lease and the borrower needs the rental income to qualify.
Step 1 determine correct rental amount
Using an appraisal on form FNMA 1004 with supporting form 1007 OR FNMA 1025 will provide the monthly market rate. If using FHLMC form 70 with supporting form 998 is required or form FHLMC form 72 will provide the monthly operating income (MOI). In this example we will use $1,500 per month for the monthly market rate or MOI depending on which investor is used. In this example we will assume the PITI on the subject is $1,000.
Step 2 calculate DTI
$5,000 borrowers job income
$125 75% of the $1,500 monthly market rent minus the PITI of $1,000
$5,125 Total Income
$700 Current Residence PITI
$200 Installment / Revolving Debt
$300 Alimony payment
$1,200 Total Debt’s
Final DTI
13.66 Housing Ratio ($700 primary payment / $5,125 gross income)
23.42 Total Debt Ratio ($1,200 total debts / $5,125 gross income)
Important considerations:
Landlord history is not required to qualify with rental income
Borrower must have the required reserves (generally 6 months) to qualify
Example 2
Purchase of any 1-4 unit rental property where there is an active current lease and the borrower needs the rental income to qualify.
Step 1 determine correct rental amount
Using an appraisal on form FNMA 1004 with supporting form 1007 OR FNMA 1025 will provide the monthly market rate. If using FHLMC form 70 with supporting form 998 is required or form FHLMC form 72 will provide the monthly operating income (MOI). Obtain a copy of the active lease (or leases if a multi unit) and compare the lease to the appraiser’s monthly market rate or monthly operating income and use the lower of the two numbers. In this example the appraisers rental rate is $1,500 and the signed lease shows the current tenant is paying $1,600 per month, therefore $1,500 must be used. In this example we will assume the PITI on the subject is $1,000.
Step 2 calculate DTI
$5,000 borrowers job income
$125 75% of the $1,500 monthly market rent minus PITI of $1,000
$5,125 Total Income
$700 Current Residence PITI
$200 Installment / Revolving Debt
$300 Alimony payment
$1,200 Total Debt’s
Final DTI
13.66 Housing Ratio ($700 primary payment / $5,125 gross income)
23.42 Total Debt Ratio ($1,200 total debts / $5,125 gross income)
Important considerations:
Landlord history is not required to qualify with rental income
Borrower must have the required reserves (generally 6 months) to qualify
You must provide a copy of the signed active lease on the subject property
Example 3
Refinance of any 1-4 unit rental property that is shown on the borrowers SCH E.
Step 1 determine correct rental amount from the SCH E
Example Schedule E Income
Add the following lines
$9,000 Line 3 Rents Received
$600 Line 9 Insurance
$1200 Line 12 Mortgage Interest
$1100 Line 16 Taxes
$3800 Line 18 Depreciation
$15,700 Sub Total
Subtract this line
($7,500) Total Expenses Line 20
Equals Final Gross Income
$15,700 Sub Total subtract expenses $7,500 = $8,200 per year / 12 months = $683.33 monthly gross income for the subject. Now subtract the PITI (in this example we will use $1,000 for PITI). $683.33 gross rent minus $1,000 PITI = ($316.67) rent loss.
Step 2 calculate DTI
$5,000 borrowers job income
$5,000.00 Total Income
$700 Current Residence PITI
$316.67 Rental loss on subject
$200 Installment / Revolving Debt
$300 Alimony payment
$1,516.67 Total Debt’s
Final DTI
14.00 Housing Ratio ($700 primary payment / $5,000 gross income)
30.33 Total Debt Ratio ($1,516.67 total debts / $5,000 gross income)
Important considerations:
Formula above assumed 12 months service, divide by number of months in service if less than 12
Borrower must have the required reserves (generally 6 months) to qualify
You must provide a copy of the signed active lease on the subject property (only used to confirm no first lien violations NOT used for rental calculations)
Example 4
Refinance of any 1-4 unit rental property that is not shown on the SCH E and the borrower is using the lease to qualify
Step 1 determine correct rental amount
Provide a copy of the current active lease, in this example we will use $1,200 for the lease amount. In this example we will use PITI of $1,000 per month
$5,000 borrowers job income
$5,000 Total Income
$700 Current Residence PITI
$100 75% of the lease of $1,200 is $900, minus PITI of $1,000
$200 Installment / Revolving Debt
$300 Alimony payment
$1,300 Total Debt’s
Final DTI
14.00 Housing Ratio ($700 primary payment / $5,000 gross income)
26.00 Total Debt Ratio ($1,300 total debts / $5,000 gross income)
Important considerations:
Lease cannot be used to override SCH E income, unless If the property was out of service for major renovations
Both agencies will allow lease if the property was purchased after the last filed tax year
Borrower must have the required reserves (generally 6 months) to qualify
Guideline Sources/ References
FNMA B3-3.1-08 Rental Income 09/29/2016
FHLMC 5306.1 Rental Income 03/02/16
FHLMC Rental Income Matrix 03/2016
Ok next week will be part 3 of this series going over “other” properties rental income. Next week we will also be providing a webinar code for a demonstration on June 24th and DISCOUNT offer for our income calculation software Uberwriter. Uberwriter will help you with any REO calculations (and all other 30 + income types) to make REO income and all other incomes a breeze. Go to our website and try Uberwriter for 30 days free, no credit card required