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How Does Rental Ownership Impact FHA Mortgage Borrowing?

How does owning rental property impact an FHA mortgage application?

Two ways.

First, you cannot use FHA financing to acquire an investment property, at least if we define “investment property” as someplace you don’t live. However, you can get an FHA mortgage for a property with two, three, and four units. As long as you live in one unit you’re allowed to rent the rest.

Second, rental income impacts an application to finance or refinance with an FHA-insured mortgage. In general terms rental income is treated as a qualifying plus when you apply for an FHA loan under these conditions:

___ You have to document that you have been receiving rental income. This can be done with leases, an agreement to lease or a rental history which covers the past 24 months. There can be vacancies, but if the vacancies are longer than three months then they are considered “unexplained gaps” in most situations and you will not get credit for rental income. Gaps are okay if the property is seasonal, the tenants are students or in the military, or the property is being rehabilitated.

___ Rents can be used to increase your qualifying income. However, you won’t get credit for all the rent you receive, instead there will be deductions for such things as vacancies and maintenance. The vacancy rate will vary according to the jurisdiction where the property is located.


___ HUD says “rental income from boarders is acceptable if the boarders are related by blood, marriage, or law. The rental income may be considered effective income if shown on the borrower’s tax returns. Otherwise, the income only may be considered a compensating factor and must be documented adequately by the lender.”

___ You must document rental income. This can be done by showing the Schedule E from your tax return and current leases.

___ The depreciation from rental units which is shown on tax returns can be “added back” to your income by the lender; that is, depreciation effectively ncreases your income for loan application purposes

___ HUD says “if the borrower in the same general area owns six or more units, a map disclosing the locations must be submitted evidencing compliance with FHA’s seven-unit limitation.” It’s not clear what is meant by the “same general area.”

The rental rules for FHA mortgages are similar today when compared with the requirements for VA loans and conventional financing. That’s because all three forms of financing are regarded as low-risk Qualified Residential Mortgages (QRMs) under Wall Street reform.

For details and specifics please speak with lenders.

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