Rental Home Financing Investment Loans
Schedule E Makes a Lot of Difference
Schedule E included in the Form 1040 is used to report income generated from rental properties. In case you face losses for a fiscal year after filing the tax returns, qualifying for a mortgage for buying a rental property can be very tough. Losses are viewed as a liability. This means that the minimum qualifying criteria can be tough to achieve.
Normally, lenders consider the past two year's rental property income to average out the figures. So, average loss or gain is quite important in case you want to qualify for buying a rental property.
Do the Math Yourself
When it comes to buying a rental property, it is not as simple to calculate the average figures. Gross income is not the sole criteria. Insurance, taxes, and lender payments in addition to appreciation/depreciation can be other relevant factors. Rental property maintenance charges is another factor that comes into play. The depreciation in the rental property will have to be taken into account to determine the time frame when the home starts to generate meaningful rental income. This is the time frame lenders will use to ascertain the real mortgage value component.
If you have a rental property in your portfolio that does not carry a mortgage, it most likely qualifies as a gain in the Schedule E. while buying a rental property through this route, lenders will consider all the rental portfolios.
Tips to Finance Rental Property
- Lenders have to consider vacancies by accounting for only 75% of total rental income for mortgages.
- If you have more than 5 rental properties all on rental home loans, lenders may not be too willing to finance more or will charge a premium.
- All the lease rental copies are required for processing.
- In case there is refinancing, you have to reduce the average rent.
- In case new agreements are in place for rent, the lender will take into account the old tax returns for historical records purposes.
- Consider a DSCR loan with no ratio to your income tax returns. Qualify with the possible rental income instead of your W2.
How Gross Rental Income Impacts Your Mortgage Qualification
The ratio of income to debt is the most vital component of the mortgage qualification. For a favorable credit dispensation, you have to maintain a good credit score, have low but regular mortgage payments, minimum personal loans (including child support and student loans) and low financial liabilities.
Buying a rental property from your current portfolio can be overwhelming. You have to not only maintain your current obligations but also add to the financial implications carefully. So, take a good step back and consider investing only when you have the appetite for risk.