A recent article in credit.com points out that your rental income could possibly help you get a mortgage on a new property that you hope to buy to lease.
Apparently some mortgage companies will take into account fair market rents when purchasing a property with the intention of leasing it. This type of financing is more expensive than primary home financing as it is non-owner occupied. Typically rates are 20 to 35 basis points higher than a primary home mortgage.
The article gives the example of somebody having had a rental property for the past few years where the new rental agreement is higher than the rental income from previous years as shown on a tax return. In this case landlords cannot use this new income to qualify because there isn’t any history of the income. When this happens, lenders are able to perform a rental property analysis that will take into account insurance, mortgages, depreciation and expenses, and the net income of this averaging will determine if your rental property could be useful for getting a mortgage.
In general projected rents can be used by the majority of lenders to offset against the mortgage payment at up to 75% of projected fair market rents. Anyone who has owned a rental property for the last 12 months can expect their lender to average their expenses which could impact income ratios and may affect the level of debt they can handle. Anyone who has bought rental property in the last year and who hasn’t yet filed a return will be able to use 75% of projected fair market rents with the rental agreement, a process that will bypass the rental averaging used by lenders.
Additionally, the way expenses are reported on a Schedule E tax form can greatly affect your ability to qualify for a loan. Even if a property is showing a loss, it may still be profitable to borrow and to carry forward losses to offset against future taxable earnings. Another choice is to sell the property to release extra funds allowing another property to be purchased while minimizing rental losses in the process.
Taking action to improve credit scores may also be useful, helping to secure better rates and terms. Sometimes it is possible to improve credit score ratings by limiting new credit enquiries, paying down high credit card debts or by waiting for negative information to reach such an age where it is wiped off the credit report.