Tag: rental

Can Income from Your Vacation Rental Help You Qualify for a Mortgage?

~ Rob Spinosa ~ Leave a comment

Ok.  I’m going to go out on a limb here and say that someone reading this post has, at one point in his/her life, taken an Uber to an AirBnB.  It makes sense and it’s a perfect exemplification of the “gig economy” working in both housing and transportation.  Take a car you don’t own to stay in a play you don’t own, yet efficiently meet the needs of your travel and lodging.

What about the other side of the equation?  Let’s say you’re the owner of the property that you list on a short-term rental website?  And let’s go a step beyond and say that you make a practice of renting your property such that it generates a quantifiable amount of income each year?  Can you use this income to qualify for a mortgage?

The Basics

Let’s first paint rental income in some broad strokes.  We’ll come back to some of these later so it’s important to understand how the mortgage industry treats rental income in general.

  1. Rental income almost always needs to be generated by an investment home.  This means the subject cannot be a primary residence or a true second/vacation home.  In cases where the property is a multi-unit (duplex, triplex, 4-unit), it is acceptable if one of the units is a primary residence while the other(s) is rented.
  2. Rental income, for the vast majority of mortgage qualifications, requires a one-year lease agreement in place.  Yes, the lease may have converted to month-to-month after the first year, but lenders are looking for stability and they largely define that as a 1-year lease to start.
  3. Guidelines will vary depending on whether the borrower is purchasing or refinancing, so in the latter case, demonstrating rental income on a property by way of a two-year tax return history can go a long way towards establishing stable and usable income.
  4. Boarder income (rooms rented within what is usually a single family residence, or SFR) is not generally allowed as qualifying income with a few exceptions.  If you think you may have such a situation, let me know and we’ll discuss in detail.

Off We Go!

I realize that some “vacation” rentals are just that.  Stunning locations, resort-like amenities, etc.  But what about the very “workmanlike” accessory unit (aka, “ADU”) on your primary home that you’ve consistently rented out over the last few years?  Sure, you’ve never had a long-term tenant or lease, but thanks to technology, you’ve been able to keep the unit rented for a majority of days in the year.  Here, we’re going to assume our borrower is looking to refinance and use the income generated by the short-term rental to help with the qualification.  Let’s again go to the numbers:

  1. If this property is your primary home AND it’s a single-family residence AND the accessory is legally permitted AND you have a two-year rental history per your tax filings, it’s likely you can use this income to qualify.  On a purchase, a rental survey would be used to determine the market rents.  On a refinance, the owner’s tax returns would show the historical rental income/loss.
  2. If you do not claim rental income on your tax returns, you cannot use it to qualify, even if you have the rental receipts to show you’re renting the property.  An exception here might be a bank statement or investor loan that does not require tax returns.
  3. If the home in question happens to already be your vacation residence, you cannot refinance it as a second/vacation home and use rental income from it.  Vacation residences cannot claim rental income per the definition of their occupancy status.

The Devil in the Details

As you can see above, the underwriting attitude surrounding short-term rental income is more favorable than it was in the past.  The trend is good.  But if you’re going to make a case for using short-term rental income (AirBnB, VRBO, etc.) from a property you own, your best bet is to have a 2-year history of declaring the income on your tax returns.  It’s further helpful to have all of your service provider receipts for the renting of the property.  Last but not least, your property must be legally able to be rented both per the terms of your existing or new financing and by any ordinances in the town where the property is located.  With the above, we are available to help with an understanding of what’s possible in terms of your mortgage goals, so get in touch any time.

Bon voyage, 

Rob Spinosa
Senior Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

What Is a Debt Service Coverage Ratio Mortgage?

~ Rob Spinosa ~ Leave a comment

Real estate investors have long turned to private money loans when conventional mortgage lenders have determined that either they, with their multiple property holdings, or the properties they are looking to buy, pose too great a risk. But for its benefits of closing quickly and not involving an intrusive qualifying process based on ability-to-repay (ATR), hard money loans are expensive and most often have terms that require the investor to refinance or pay off the loan in the short term — not an ideal fit for those who own, or are building, a portfolio of rental properties and who are looking to stabilize their cash flow. Enter the DSCR or “debt service coverage ratio” mortgage. This unique program seeks to provide the investor with a way to qualify for the mortgage without focusing on personal tax returns and debt-to-income (DTI) ratios. These are conventional loans that look more at the property than the borrower — almost like a commercial or private money loan — but with the added benefit of more appealing terms.

Our DSCR or “DCR” (debt coverage ratio) mortgage is designed for borrowers who are experienced real estate investors looking to purchase or refinance an investment property that is held for business purposes. We qualify these borrowers based upon the cash-flow of the subject property and they are not required to provide additional employment or income related information — let’s emphasize this again.  We are focusing on qualifying the property above the borrower. So where, in a traditional mortgage for a primary home, for example, we would be calculating debt-to-income based on the borrower’s paystubs and tax returns, and liabilities that carry over from the credit report, here we are looking at the cash flow of the property instead. Let’s dig in a little deeper.

Qualifying with Debt Coverage Ratio

The debt coverage ratio is calculated by taking 100% of the gross rents divided by the total monthly housing payment (PITIA) of the subject property. If a lease is in place on the subject property, we’ll use that number (with some exceptions) but if a lease is not in place, we’ll defer to the appraiser’s rent schedule. In order to qualify, our property must produce a DSCR ratio of greater than 1.0. So for example:

Property 1

  • Gross Rents = $3000
  • PITIA = $2800
  • Formula to determine DSCR: $3000 / $2800 = 1.07
  • A 1.07 DCR is greater than the 1.0 requirement to qualify, so this property is eligible for approval.

Property 2

  • Gross Rents = $1900
  • PITIA = $2250
  • Formula to determine DSCR: $1900 / $2250 = .84
  • Our DCR is .84 under the 1.0 requirement to qualify, so this property is NOT eligible for approval.

Both fixed rate and ARM programs are available to the investor on a DSCR qualification basis and this further expands the benefit of this qualification method. For those who own multiple investment properties and may not fit the qualifying criteria for a qualified mortgage (QM), the debt service coverage ratio alternative may be the solution you’ve been looking for. We’re here to help and answer any questions regarding your rental properties.

Come on in and cover me, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Rental Income from Accessory Units. Hot or Not?

~ Rob Spinosa ~ 2 Comments

I don’t know about where you live, but here in Marin County, accessory dwelling units (“ADU”), also known as accessories, 1+’s, granny units, in-law’s, mother-in-law’s, etc., are all the rage. When we discuss remodel projects with our clients, adding an accessory is often high on the list. After all, if permitting allows, the thought of having the extra space to accommodate guests, parents or children, short- or long-term renters or maybe just create the proverbial doghouse in marriage under the strain of any/all of the above, can be appealing. But from a mortgage guideline standpoint, if you have or build an ADU, can you use the rental income it may generate in order to help you qualify for a home loan?

Get in the Zone

In order to answer our question about qualifying income, we have to address two key elements first:

  1. What is the legal description of the home?
  2. What type of loan are you seeking to obtain?

Let’s take a look at the first question from both the angle of the legal description of the property and also the method by which an appraiser might likely approach the opinion of value. It’s safe to say that if the property was built as a single family dwelling (SFD or SFR — for “residence”), adding an ADU will not change that. Usually the footprints of the structures will be sufficiently different such that the property would always be viewed as an SFD. When a second structure is built on one lot, per zoning requirements of course, and that home becomes a true second residence (different address, different utility meters, etc.), now we may be looking at a legal duplex instead. But for the scope of our conversation, let’s stick to the 1+ scenario. When an appraiser is hired to complete a report on an SFR with an accessory, he or she will check a box on the report that shows the property is a “1+” and the report will be done on a 1004 form (as opposed to the appraisal form 1025, which is used for 2, 3 and 4 units).

Now traditionally, if you have sought a mortgage for a legal 1-unit property, even with an accessory, and that home was your primary residence, lenders would NOT allow you to use the rental income in the qualification process. Boarder income (room rents), short-term rentals (AirBnB, VRBO, etc.) and even rents resulting from legitimate lease agreements on an ADU were a dead-end. This proved problematic for both buyers and owners of these properties because often the ADU, and its income-producing properties, were important characteristics in the desirability of the home itself. Absent categorization of the property as a legal 2-unit, rental income was out and borrowers had to qualify with employment-based income primarily. To further the confusion, some buyers would think they were buying a duplex, which has a higher conforming loan limit, and base their down payment and other terms off of that assumption, only to have their hopes dashed when they learned the home is legally an SFR with an accessory. As with many things in the inherently complex world of real estate, the grey area could be vast and the consequences serious.

What’s Changed?

Conforming loan programs (save for HomeReady) still adhere to the approach above, but there are some very promising options for the use of rental income if you require a jumbo mortgage. For the most part, we have really strong options for the inclusion of rental income from an ADU with a number of jumbo investors. The gold standard tends to be that the rental income must have been declared on the borrower’s tax returns for the last two years. In short, a history is required to document stable income production from the ADU. Now as you might suspect, this is going to preclude a purchase loan, where the buyer would not be able to produce such a history. In that case, we have another investor that not only accommodates ADU income on a purchase, but will use an appraiser’s opinion of market rent for the unit (as opposed to requiring a lease agreement).

ADU, short-term rentals and boarder income are all a reality in many markets. And the trend appears to be increasing in terms of the popularity of these property and the financial benefits they can bestow to the owner/borrower. It’s also a fact that not all mortgage lenders have the programs that will take this income into consideration and have it work to the borrower’s advantage. We are one of the lenders who will and if you have any questions about the generation and use of the rental income from your one-unit, primary home, give me a call any time.

ADU 4 U n Me, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283