Question about buying a home and the 28% rule

Its my understanding a rule of thumb mortgage companies is to only lend enough money so that 28% of your monthly gross income could cover property taxes, homeowners insurance & mortgage payments. However what if you want to get a mortgage on a multi-family unit dwelling like a duplex, would the mortgage company also take into account the (potential) revenue you would make from the other dwelling into the 28% rule or do they just go by your own income?

I believe they just go by your own income. After all, it’s the buyer of the milti-family unit who is responsible for the mortgage, and there’s no way for the mortgage company to be sure the other unit(s) will be consistently filled. They buyer can’t pay a mortgage with rental income he doesn’t have!

I’m a commercial real estate appraiser, specializing in multi-family properties (particularly low-income housing). I’m not a banker and have never been one, but I work with them all the time.

I would imagine that yes, the potential income from the units will be factored in. Ultimately the decision is the bank’s, and there’s probably going to be a lot more scrutiny for a multi-family property. If it has four or more units, they will have to hire a certified general real estate appraiser (in other words, commercial), and that’s gonna cost some money right there. Part of the decision is probably based on how competent they think you are at managing rental units. I can tell you that the value of the property is in all likelihood a direct function of the potential income, under the assumption that you aren’t living in one of the units yourself.

Thanks. Is that just for oklahoma or nationwide about the 4 unit rule?

What i was thinking about, and this is just brainstorming, is getting a 2 unit house for around $100k and renting out one of the halves while living in the other. When i graduate and my salary is about 36k a year i should be able to pay for that with 28% of my income, but i’d rather get a 15yr mortgage than a 30 year and a 15 year on a 100k or so house might be above the 28% rule.

What does this mean

“I can tell you that the value of the property is in all likelihood a direct function of the potential income, under the assumption that you aren’t living in one of the units yourself.”

That the cost of the house is based on how much you could get in rent for it? I dont know what you’re saying.

It’s more like the 38% rule, and is cross compared with you credit score.

It doesn’t matter if you come in at 15%. A poor score will kill the mtg or kill the interest rate.

Top Tiered credit folks can go past even the 38% rule.

Since your average Californian can be shelling out up to half his monthly gross income on mortgage payments, homeowner’s insurance, and property tax – due to the excessively high real estate prices throughout the state – I’d bet that the actual percentage in the “28% rule” varies from region to region.

you can still get a mortgage with a piss poor credit score, just a high interest one. I guess you said that though. My friend got one for 9%, and i think its mortgage/insurance is only about 15% of her household gross income, and she can always take out more student loans to pay the $250/month for mortgage & insurance if she needs.

I guess a high rate wouldn’t bother me much as i want to pay off the principal as fast as i can so i can save money on interest payments.

I don’t think the 28% rule is as hard and fast as it once was, at least not here in the northeast where housing has become very expensive and many people seem to pay something like 35% of income to meet their housing costs.

I have a three-family house; I live in one apartment and rent the other two out. The rental apartments provide me with most of my income; I made a very large down payment when I bought the house in order to keep the mortgage small, so that I could keep more of the income.

I was surprised, when I refinanced two years after buying the house, that the mortgage company would only take into consideration a very small percentage of the actual rental income – something like 17%, if I remember correctly. I think this is pretty common, but again, it may depend on what region you’re in.

It’s a federal thing. The FDIC was given broad regulatory powers by the Financial Institutions Reform, Recovery & Enforcement Act of 1989 (a result of the S&L crisis). As a result, if you’re insured by the FDIC they get to make all kinds of rules about how mortgages get written.

I knew a guy who did that… the rent he was getting covered the entire mortgage, so all he had to pay was utilities, taxes, insurance etc. and was building equity at the same time. Quite a deal! I’d just tell the mortgage broker/banker exactly what you’re planning on doing, I’m sure it’s not at all uncommon.

Ah ah, not “cost,” “value.” A home (or any building) costs so much to build, but the value of the property doesn’t necessarily have anything to do with that. Duplexes and other multi-family housing types are considered “investment properties” in the sense that if you’re buying one, it’s because you want to make money off of it. If all you care about is money, then the amount you’re willing to pay for such a property is directly proportional to how much cash it generates.

Even if you’re buying a duplex and planning on living in one unit, the value of the property on the open market is a function of the rents it can command, and your appraiser will value it as such (at least he will if he’s competent!) In looking for a duplex, then, you should always be thinking “what kind of rent can I get for this thing?” Flip through the classifieds and see if there are any similar duplexes for rent near yours and what they rent for. Some items like pools or vaulted ceilings may command higher rents… but the primary items of comparison are

How big is it in square feet?
How many bedrooms/bathrooms?
How big is the garage?
What’s the neighborhood like?
Who pays what utilities?

I can’t tell you much about the actual management of a duplex, apart from the obvious advice: have a professional draw up a proper written lease agreement!