75% rent credit

Financing, Hard Money Lenders, Private Money
1

All,
I’ve heard before about lenders using 75% of the rent to count towards income and cover the mortgage payment and help qualify you for the loan.

I was at an REI class this last weekend, and one of the instructors said that now this can only be used if you have 2 years of documented experience with rentals, and otherwise you have to qualify without the help of the rents, or go stated income. It was a mortgage broker that made that statement.

Is that correct from the experience of people here, or are there lenders that will use the 75% on your first deal?

Thanks.

2

I’m brokering a deal for a client that has purchased 2 rental properties in the last year. These were her first investment properties and the lender counted 75%.

3

No it is not true in the residential arena you can have your first investment home and they will count the rent from day one

Now if you are buying commercial that is another arena and it is true in this area because they do not want novices to buy 5+ units with NO EXPERIENCE

I think your instructor was confusing the two :hammerhead: :

Either way trying to keep residential rules and commercial rules straight is hard for even some seasoned brokers :shocked:

LOL

4

Thanks for the responses!
That’s great to hear.

I guess I know who I won’t be using for my mortgage broker now :wink:

5

Yes that is great news

I also would like to mention that even if you have 10+ properties and you still want to buy more in the residential arena they will still count 75% of all your rents from day ONE. YEAH :grinyes:

6

So that means to “break even” you will need a 75 ratio of Debt service + Operating Expenses / Gross Operating Income = Break-Even Ratio. Lenders like to see 85% or less on this ratio, all depends on the deal and the lender. Generaly this statistic is used on commericial loans and not Residential.

Another common ratio used is the DCR. Debt Coverage Ratio. This is the Annual Net Operating Income (NOI) / Annual debt Service = DCR. This needs to be 1.20 or higher depending on the lender and the deal. Again, this is a term generally looked at for commercial loans vs residential. (Commercial is 5+ units when they are residential properties)

7

I’m from the Boston area, and am looking into purchasing 2 3-families with positive cashflow, and also have potential of buying a package of 5 single-family rentals, again with positive cashflow.

No brokers can answer this question, which is seemingly addressed by this post…I know lenders look at your debt-to-income ratio when financing a property. Is there any way, besides scheduling all 7 closings within the same week, to purchase ALL these properties, and have lenders be OK with it? Example: I was given the formula that the Expenses should be no more than 70% of the rental income on the property, to ensure safe cashflow.
If banks consider 75% of the rental income, than in theory, should I be able to purchase as many of these multi-units as I can, whenever I can, as long as they all produce positive cashflow? (I’m talking strictly residential, non-commercial properties).

I’m just debating whether or not to even attempt scheduling all these closings at the same time, to prevent other lenders from seeing the other mortgages on my credit…

Any help would be appreciated!

8

Is the 75% based on market rent in the area or do you have to have a renter in place for it to be counted?

9

Looking mainly at properties already fully-tenanted, but one property is indeed vacant (but was given market rents from a Prop. Mamagement / Realtor’s Office).

10

The Operating expenses/gross operating income = break even ratio only applies to commercial financing…maybe even hard money. Here’s the conventional guidelines that applies to the buyers in this post:

First, you need to understand, that most loans are underwritten to Fannie Mae or Freddie Mac guidelines. They both are now requiring landlord experience for 2 years on investment properties, and always use 75% of rental income based on the market rent that the appraiser puts in his report. On any investment property, an operating income statement is required which shows what other similar properties are renting for in the area. This amount gets added directly to your regular income, and then the new payment plus all of your old payments get divided into that number to determine your qualifying ratio which shouldn’t exceed 42% of your total income. What this means is that you not only need enough income to qualify for your own home + all monthly debts, you will also need additional income to qualify for the new payment. You can’t expect that if the new payment is less than the 75% rent, that you will qualify for the loan. It doesn’t work that way.

There are other types of loans that allow 100% of rental income to qualify, and one or two that allow break-even qualifying (specialty products), so if you want to go conventional…which you should in your scenarios, you should either go full doc if you have some extra income, or go with a No Ratio/No Doc loan. This is why they’re so popular!