Can Rental Income Help Me Get a Mortgage?

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You may not know this, but you can use projected rental income to qualify for a mortgage on a new property you’re looking to buy and lease out. Here’s how it works.

Some mortgage companies will give you the benefit of fair-market rents when you purchase a property with the intention of renting it out. This type of financing is called non-owner occupied and costs more than primary home financing. You can expect to receive a rate that’s 20 to 35 basis points higher than owner-occupied and secondary home transactions.

Now, let’s say you’ve had a rental property for the last few years. Your new rental agreement is higher than the rental income from previous years, which is identified on your tax return. You cannot use this new income to qualify, as there is no history of that income.

Instead, lenders will perform a rental property analysis, taking into consideration depreciation, expenses, insurance, mortgage, HOA and interest paid to banks. The net income of this lender averaging will determine how your rental with hurt or help your ability to borrow.

It’s important to keep in mind that showing big losses on your Schedule E (the tax form listing supplemental income and loss from rental real estate, royalties, partnerships, estates, trusts, etc.) can actually limit your borrowing power. Though it won’t automatically preclude you from qualifying for a mortgage, it will factor into your debt-to-income ratio, or DTI. (Your debt-to-income ratio is a benchmark percentage lenders use to assess how much debt you can carry against your income.)

How Rental Income Factors In

Here are some general lending rules for rental properties.

  • Projected rents may be used by most lenders to offset against the mortgage payment at up to 75% of projected fair market rents determined with an appraisal when buying a property.
  • If you owned a rental property for the last 12 months, the lender will average your expenses, which may impact your income ratios and ultimately how much mortgage you can handle.
  • If you bought a rental in the last year but have not yet filed your return, you can use 75% of projected fair market rents with a rental agreement, bypassing the rental averaging lenders use.

How you report your expenses on your Schedule E will make all the difference in your ability to qualify for a loan. Even if a property shows a loss, it can still make sense to borrow, as keeping the property over time might mean carrying forward losses to offset against future taxable earnings.

Alternatively, selling the property may net extra funds that allow you to purchase another property and minimize rental losses in the process. Please note, you should always consult with a licensed tax professional regarding your unique situation.

Remember, a good credit score, too, can help secure a more affordable mortgage since it helps you qualify for better rates and terms. (You can see where your credit currently stands by pulling your credit report for free each year at AnnualCreditReport.com and viewing two of your credit scores for free each month on Credit.com.) You may be able to improve your score by paying down high credit card debts, limiting new credit inquiries and waiting for negative information to age off of your credit report.

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How Do Credit Inquiries Affect My Credit?

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An inquiry occurs when your credit report is pulled. This may happen when you apply for a new credit card or take out a personal loan. There are two types of inquiries that assess your report: hard inquiries and soft inquires. Here, I have broken down the difference between the two and how they can influence your credit score.

Hard Inquiries

Hard inquires can have a negative impact on your credit score. This type of inquiry generally occurs when a financial company or lender checks your credit report. This can be for a mortgage, student loan, credit card or auto loan. For example, you may apply to take out a loan with a private lender and before the lender approves you, they’ll want to make sure your finances are intact.

Hard inquires may initially lower your credit score by a few points, but the important thing is to not worry. A credit score fluctuates often. It is important to work on maintaining good credit and making sure all of your payments are made on time.

Still, you should always be cautious of how many hard inquires you have in a short amount of time. It’s a good idea to avoid applying for several credit cards at once, as this can negatively impact your credit. Also, having several credit cards could put you at risk for winding up in debt if you don’t manage them responsibly.

Removing a Hard Inquiry You Didn’t Approve

If you see a hard inquiry on your credit report that you weren’t aware of, you may want to consider calling the creditor to let them know you did not approve it. In most cases, they will conduct a brief investigation and remove it.

Just like any error on your credit report, you can also dispute inquiries. You can do this by filing a dispute directly with the credit bureaus and stating your case. It is important to keep your finances in shape and maintain good credit, so if you ever see an error or incorrect inquiry, you’ll know to take action. (Unfamiliar hard inquiries could also be a sign of identity theft.)

Soft Inquiries

Soft Inquires, on the other hand, aren’t generated by shopping for credit. They most often occur when an outside company or person wants to perform a background check. This will typically put a soft inquiry on your credit report, letting you know the action took place. However, this will not lower or damage your credit score. While hard inquires require your permission, soft inquires often do not. Don’t be alarmed — this shouldn’t affect your credit score in any way!

Another example of a soft inquiry is pulling your own credit score (which you can do for free on Credit.com). Keep in mind, checking your credit score will not hurt your credit score. Other soft inquiries can include pre-approval for credit cards, inquiries generated by an employer or inquiries generated by an insurance company.

More on Credit Reports & Credit Scores:

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How Your New Job Affects Your Chances of Getting a Mortgage

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Changing jobs is a natural part of a long and eventful career. But if you’re trying to impress a mortgage lender, you need to know some of the basics when it comes to employment.

First, mortgage companies typically want to see working applicants who have been in the same field at least two years. The reason: A solid two-year work history is a good indicator of one’s financial stability. Here are some common employment scenarios and how they may play out with lenders:

  1. In college, you studied a particular field and now have a job in that field. This scenario would be acceptable in nearly every mortgage loan program as long as there’s documentation.
  2. You’ve just changed jobs within the same field but are earning less than before. This scenario would be acceptable, and the lender would use your current income to see if you qualify for loans.
  3. You’ve just changed jobs — and career field. This scenario would be questionable, and your ability to qualify would depend on how much the lender was willing to help you.
  4. Your new job situation is temporary. This income would be averaged as if you were a salaried employee who switched to impermanent income.

What Paperwork You Need

In most cases, other than college, lenders want to see documentation on your new job and income. Paperwork for a new job should be highly detailed and include your new title, new role and salary. More specifically, mortgage companies expect paperwork with your:

  • Start date
  • An offer letter with compensation
  • A pay stub
  • Verbal confirmation of your employment, which will come later

All these are critical, especially if the job you took is brand-new and you have no previous history of earning a particular type of income, i.e. going from a salary to an hourly wage or receiving a raise. You should be able to get pre-approved as long as the job has a start date; the key is providing the items with timely documentation.

The top mortgage programs, including conventional, Federal Housing Administration and Jumbo, all follow the same requirements for using brand-new job income for applicants. It doesn’t matter if you’re buying a home for the first time or refinancing a home you own.

But if you’re already in the process of applying for a mortgage, it goes without saying you generally shouldn’t change jobs in the middle of the process. If you must or know a possible change to your financial picture is in the works, handle that first, and then you can begin the mortgage application process.

Changing jobs in the middle of the process won’t just delay things but can potentially impede your ability to secure financing. Another smart alternative would be to secure mortgage loan financing then make a job change when you have a low-rate, low-cost home loan you can handle — despite any changes to your income.

Remember, too, a good credit score can help you qualify for the best terms and conditions on a mortgage. You can see where you currently stand by viewing your two credit scores for free, updated each month.

More on Mortgages & Homebuying:

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