Profile picture for NY_
  • NY_
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How much LTV needed to count rental income?

I am buying a house as an FHA loan, and I currently own a condo, which is conventional ARM loan. What would the FHA underwriter look at to count potential rental income from my current condo if the issue of DTI surfaced? my current DTI is at 48% if I count both loans without factoring in any rental income;
  • October 23 2010 - Rego Park
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Answers (5)

According to Mortgagee Letter 2008-25, you cannot use rental from your current property when purchasing an FHA home.  Both mortgages will have to fit within your DTI.  Depending on your credit and if that 48% DTI is your top or bottom ratio you may still qualify for an FHA purchase.  

There two exceptions to this though.


The limited circumstances in which rental income may be counted are:

  1. Verified Relocations – where the transfer or new job is verified and a signed lease, security deposit and first months rent can be verified.
  2. Sufficient Equity in Vacated Property – The vacated property has a loan to value of 75% or less as verified by a current appraisal. This appraisal must have been done within 6 months and can be a FNMA/FHLMC exterior only appraisal.
I hope this was helpful.
  • October 24 2010
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For FHA you need 25% equity position, a signed lease agreement and a paper trail showing the renter's security deposit in your acct.  
  • October 24 2010
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Profile picture for Gamache Team
Generally they count 70% of the rental income.  You would need a renter in place and a rental agreement in order to provide to the lender.  For example if you rent your condo for $1000 they will count $700 as income.  Confirm with the lender you are working with.  If you can qualify without the renter that is great but if you need the renter the trick is to find a renter that will work with you on possession.  Good luck!
  • October 24 2010
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Profile picture for NY_
  • NY_
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Thanks Celia, but there must be specific guidelines of some sort that the underwriter will go by. Maybe you are right that its up to them how to interpret those guidelines, but what are those guidelines? and the main question remains unanswered: how much LTV needed to count rental income?
  • October 24 2010
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Hi there -
Boy that is a tough question. 
It so depends on the underwriting. 
Truly talk to your lender and see what general practices they use.
I don't mean this email to scare you or to deter you from moving forward.  Instead I hope that it just prepares you for possible obstacles. 

If I were you I would just keep the knowledge in my back pocket and see what your particular underwriter wants.

I've seen this issue be a "no brainer" and also seen it be a real problem. 
Typically they would like for you to have a rental history that shows on your tax returns.  But FYI and for future reference if you claim additional expense items on your returns regarding the property such as repairs or management (just as an example) they may subtract that before using the adjusted rental income less the 25% vacancy factor.
Since you will not have that often they may allow you to produce a rental contract for at least 1 yr with the new renter giving some documented funds for a deposit or first months rent.  It cannot be a relative renting ...
They figure rental income at 75% of what you get as rent.  Saying that 25% is used as a "vacancy factor."
I have done many of these loans and SOMETIMES I run into ...

Underwriter wants a Rental Appraisal to substantiate that the rent charged is reasonable and fair.

Underwriter figures that you should to be able to carry both mortgages without any factor for the rent you will receive.

Underwriter wants you to have 2 months of reserves for mortgage payments on both properties, i e., you have that in your bank after the dust settles from your new purchase.

Underwriter wants all the information (Certification) from the condo association re: association type and deliquency factors. 

I am hopeful that you will have a good underwriter that sides towards it being easy. PLUS they may make exceptions to your DTI percentage based on everything.

Sincerely,
Celia
  • October 23 2010
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