Mortgage Approval: Documenting Rental Investment Properties

Learn how to qualify for a new mortgage if you currently own investment properties.

All mortgage applicants must fully document any rental income and expenses for any rental properties that they will own at the time of their mortgage closing.

One of the most common transactions in the past was for a home buyer who still had an existing home to sell tell their mortgage lender for their new home that they would be renting their existing residence. Borrowers cannot use that technique anymore.

In the past, home buyers with an existing home would be able to state on their mortgage application that they would be renting their existing residence when they buy their new home. They could then qualify with the projected rental income from their existing residence to offset those expenses Most lenders did not even require a lease on the existing residence and instead would simply have the appraiser estimate the fair market rent for the property.

In 2010, however, the rules are different as Fannie Mae, Freddie Mac and FHA has tightened guidelines concerning existing residences. Any home buyer with an existing residence must have at least 30% equity (as verified by an appraisal on that property) in order to include rental income from that property.

If a mortgage applicant has less than 30% equity in the rental property, the rental income cannot be included to qualify for the new mortgage. However, all of the mortgage, tax and insurance expenses do need to be included in the calculation of borrowers total monthly debt obligations. Most borrowers cannot afford to carry two mortgages, especially considering that Fannie Mae, Freddie Mac and FHA have all cut back their maximum debt-to-income ratios for all borrowers.

For other rental properties, underwriting requirements have also tightened up because most lenders will now only include rental property income as reported on the borrower's most recent tax return. In the past, a borrower could provide a copy of current leases and proof of the mortgage, taxes and insurance. The lender would give the borrower credit for 75% of the lease amount as income and subtract out 100% of the expenses. Now, if a property was vacant during the previous tax year or if a borrower had higher than expected repair costs, the net rental income will be much lower than a borrower would normally get credit for using the lease income.

To make it even more difficult, borrowers must document six months of payment reserves for every rental property they own. For example, if you own three rental properties each having payments of $2,000 per month, you need to show that you have at least $36,000 separate from all other funds in order to even qualify for any mortgage.

Freddie Mac, FHA Fannie Mae also imposed further limits on the number of financed properties that a borrower could own and still qualify for one of their loans. Borrowers can now only own a total of five financed properties including the property they are purchasing, although in some cases with Fannie and Freddie borrowers can own up to ten maximum. The old rule was that borrowers could own as many as they wanted if they were buying a primary residence and up to 20 if they were buying another investment property.

All of these rules apply whether you are buying a property to use as your primary residence or you are buying another investment property.

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