Income requirements (loan, interest rate, credit score, rate)

[Sweetbeet]

I have a question about how income is considered when determining how much of a loan you qualify for. I know that banks typically 'permit' you to spend a given percentage of your "income" on housing, somewhere around 28-36% (is that right? please correct me if I'm wrong on the percentages). My question is this: if you earn a reasonable living from a 'day job', and also have substantial rental income from the property that you're buying (say it's a 5-unit property and the purchasers are going to inhabit two of the units, and rent the other 3), are you 'allowed' to spend a higher percentage of the rental income on a mortgage loan and other housing expenses (taxes,insurance)? Or do they limit you to the same percentage of rental income as for wage income?

It seems to me that if a person can live on 70% of a good salary (the amount left after allotting 30% for housing), then it makes sense to allow them to spend a higher percentage of the rental income to support the property itself. Is this how it's done? Does it depend on the amount of income a person has from wages and other (non-property-generated) income?

[renriq02]

Depends on your credit/down payment/reserves
Most lenders follow the automated underwriting system.
If you have a 5% down payment...and a 720 score..few months of reserves....you can go up to 65% at least.

You can only use 75% of the rental income....if you receive 1000..then they will only use 750 as your actual income received.

Originally Posted by Sweetbeet

I have a question about how income is considered when determining how much of a loan you qualify for. I know that banks typically 'permit' you to spend a given percentage of your "income" on housing, somewhere around 28-36% (is that right? please correct me if I'm wrong on the percentages). My question is this: if you earn a reasonable living from a 'day job', and also have substantial rental income from the property that you're buying (say it's a 5-unit property and the purchasers are going to inhabit two of the units, and rent the other 3), are you 'allowed' to spend a higher percentage of the rental income on a mortgage loan and other housing expenses (taxes,insurance)? Or do they limit you to the same percentage of rental income as for wage income?

It seems to me that if a person can live on 70% of a good salary (the amount left after allotting 30% for housing), then it makes sense to allow them to spend a higher percentage of the rental income to support the property itself. Is this how it's done? Does it depend on the amount of income a person has from wages and other (non-property-generated) income?

[Sweetbeet]

Thanks! We have good credit scores (mine's over 700, my sister's is probably similar). We would have about a 33% downpayment (unless you think it would be better to put less down, invest the rest and use the income - that's another question. How much does it benefit the buyer/investor to make a downpayment greater than 20% (aside from having a lower payment and paying less interest)?).

We might be able to get the property for about $1.25 million, we would occupy two units and rent the other three, with rental income of approximately $3,500/mo. So you're saying that they might let us 'spend' 75% of that, or $2,625/mo., for housing expenses.

With a 400K downpayment, the payments on an $850K mortgage (30-yr fixed at 6% - is that too low?) would be $5,096. So our income would have to support payments of $2,471, plus taxes and insurance. I think this is doable.

Anything that is likely to hang us up on this kind of a deal? We have verifiable income (i.e., salaried jobs) and low debt. There would be 2 or 3 joint purchasers, me and my sister, and possibly my husband (he has insubstantial income, so we could include him or not). We have a guaranteed tenant for $1,000/mo. for one of the three units (our mom). We have owned property in another state, my husband and I for 14 years, my sister for 20+. We would be selling our home, she would be keeping her property (valued at over $200K, with a very low home equity mortgage, maybe $50K), which could also be used as security for the loan. I have been employed at my current job for 16 years (with a state government).

BTW, what interest rate would be applicable, owner-occupied or investment? What are the rates running right now?

[renriq02]

What state are you in? I will price it out...

Also just to clarify that this home is a 4-unit property

[renriq02]

It will be a jumbo loan if you go over 801k....if you can get it down to 801 loan amount you can get rates as low as 5.5% on a 30yr fixed.

Most lenders will not use rental income from family members renting out a unit....They may also require rental experience from previous rentals.

if the mortgage amount is 5000 then you can subtract 750 from it (If the U/W agrees to use the rental income)

It should qualify as a owner occupied home.

[Sweetbeet]

All good info!

State is Hawaii. It's a 5-unit property. Sis lives in one, me in one, and we rent the other 3.

I figured that it would be in our favor for sis and I (who have good incomes) to buy the property, and then rent to mom (who has lower income). That way the income we get from mom will be counted at 65-75%, instead of at 28%. The bank doesn't care what our tenants' income-to-debt ratio is, right? If we do the deal without disclosing who we will be renting to, and later rent to her, is that a no-no?

I am currently seeking the rental history and current situation of the property.

There is also a possibility that we could do weekly rentals, at a much higher rate, given the location (i.e., Hawai'i).

What about having sis's current property (she lives in HI but owns property in NY - currently vacant but could be rented) as additional collateral? Would a bank accept out-of-state property as additional collateral? Or maybe we won't need it, and it'd be more trouble than it's worth. It doesn't hurt the balance sheet, even if it's not part of the actual security for the loan.

What would the rate be for a jumbo? We could easily do under $800K IF sis sells her property, but it's a specialty property (off the grid, fully solar electric, earth-bermed home on 114 acres), which might take a while. We might be able to get it down if we can get the price down, or if I can scrape together a bit more $$ from various places. But if we can't, how much worse would the rate be? I think 5.5% is great!

Why am I subtracting $750 if my net rentals (let's say, not counting mom) are $2,500? Wouldn't I subtract$1,875?

[renriq02]

5 unit? I think that turns into a commercial property.

You should speak to a local bank or lender

[rcarrillo]

Anything over 4 unit is usually tougher as it is considered commercial property. The problem is RESPA and what is and is not covered by the law. Its 1-4 unit homes only, and I can not think of 1 lender that does 5 units as residential anymore.

With commercial the requirements, down payments and rates all get much tougher. Check with a local mortgage banker or broker.

[Sweetbeet]

Oh, bummer. I think you are all correct - I'm in the court system, see a lot of mortgage papers, and there is typically a "1-4 family rider". That tells me that there is some kind of threshold that is crossed at 5 units. So this may be a whole 'nother ball game for us...

We will be talking to our mortgage lady soon. Thanks everyone for the advice!