Rental income is treated in one of two different ways, depending on whether the applicant lives in the property.
- Owner-occupied: gross. With two-, three- and four-unit properties wherein the applicant occupies one of the units, the applicant can use 75% of the gross rental income as personal income. Only current rental income from occupied units can usually be used. Projected rental income from vacant units can sometimes be used, based on what the appraiser indicates is the market rate and outlook for the area. Moreover, the applicant cannot factor in potential income from the unit he or she occupies. [For example, Arlene is buying a three-flat; she intends to live in one of the units and rent out the other two units for $500/month for each unit, or $1,000 gross. When qualifying for the loan, she can use $750 (75% of the $1,000/month gross) to increase her qualifying income.]
- Investment (non-owner-occupied): net. With properties that the applicant does not occupy—as well as properties with five or more units that the applicant does occupy—the applicant can use 75% of net rental income. Net rental income is the gross revenue less operating expenses and mortgage debts. On the plus side, the mortgage debts in this situation are not included in the final debt-to-income ratio calculations. However, if the net rental income shows a loss, that loss is treated as long-term debt and is added to the applicant's monthly debt calculation. [For example, Arnold is buying an investment four-unit bulding. Each unit brings in $500, for a monthly gross total of $2,000.His monthly mortgage, insurance and tax payments total $1,900; so Arnold's net rental income is only $100. Only $75 is added to his base personal qualifying income; but that's okay, because the four-unit will not be included in his income qualification.]
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