Say a person in their 30s is planning on buying their first house. Based on their income, they can afford to pay $2000 a month toward a mortgage. But, having had roommates all their lives and being comfortable with that lifestyle, they plan to rent out a bedroom in the house, for which they can get $1000 per month rent. (Let’s assume this is in an area where they are pretty much guaranteed to find a roommate.) Can they convince a mortgage company that they can actually afford to pay $3000 toward the mortgage because of the new income stream which be available after they buy the house?
Probably not. Mortgage companies typically want to be able to verify income streams. If you had existing properties and they had been rented for a while, then they might take that into consideration. But it’s pretty unlikely that they’ll take a risk on someone who says they will rent a bedroom for $1000 to make up the difference. Also, there might be some restrictions in the mortgage that you will be living in the property rather than renting it out. Typically that’s for when the whole house is being rented, but it might apply in this situation as well. If you bring up that you plan to rent a bedroom, that may actually throw up some red flags.
If you were to admit to a mortgage company that you were planning on renting out any portion of a house, you would have to apply for a commercial mortgage, not a residential one. So the rules would be different. You would have to supply a business plan showing projected income and expenses, and more. You’d also have to show that getting the expected income was a near-sure thing, such as a lease or cash bank deposit, which would probably become part of the loan collateral.
I don’t think so. Mortgage companies tend to treat properties differently based on whether they are your primary residence vs an “investment property”.
No. Typically you have to be able to show your stated income for the past two years (minimum) to be approved for an amount based on that income. For rental or other passive income, that proof is typically your past two tax returns.
However, when musicat wrote:
Also no. While banks set a limit on how many tenants you can have before a loan is considered commercial rather than residential, that’s typically three rental units when you are living on the property, meaning you can still get a residential mortgage on a 4-flat (I did for my first mortgage) or a house large enough for that many more people, but you still won’t be able to count the expected rental income when you apply and you will have to stay there a minimum of two years.
Basically, you’ll need a deposit large enough to bring the mortgage down to your verifiable income level, which you’ll recoup when you start collecting rent.
epbrown01, are you a loan officer in the state of Wisconsin? If so, I will defer to your greater knowledge. If not, perhaps you need to acknowledge differences in states when it comes to real estate matters.
Please, stop now. Be better than this.
Lousy idea anyway. That $1K won`t all be income anyway.
I have no problem deferring to your greater knowledge - but are you really telling me that in Wisconsin a bank will insist on a commercial mortgage because I have a single roommate/boarder? Because that’s what the OP is talking about - he’s not talking about a 2 or 3 unit building or even running a rooming house. I don’t think the $1000/month he thinks he’ll get will make a difference in qualifying for the mortgage, but that’s a different issue.This page does not seem to be talking about commercial mortgages- and the various loans have statements in the eligibility requirements as
and
Now, I suppose it’s possible that the lenders will only approve a residential mortgage for a 2 unit owner-occupied property if the applicant comes through WHEDA and commercial mortgages for all other 2 unit properties (whether or not they are owner occupied) but I kind of doubt it.
If you’re getting a loan based on Freddie/Fannie guidelines, you can’t use rental income from a primary residence unless it’s 2-4 units. So if it’s one unit, rental income from a bedroom can’t be used. Even if you have a history of it.
We just signed the papers on a refinance in Ohio and one of them stated the loan was for a primary residence with no rental.
Dennis
Going through something similar now. They will approve $0 of 1099 income until it has been for 2 years. I can’t imagine the OP’s situation is any more flexible.
Fannie Mae and Freddie Mac probably exert the most influence with their rules for conforming loans, which isn’t really a state based thing.
One more thing to add, rental income on the property won’t offset the payment, it gets added to income. One of the main factors in qualifying is your debt-to-income ratio, which usually has a max from 43$ to 50%. So if you have a max debt-to-income of 50%, adding $1000 in rental income means you can only afford an additional $500 on your mortgage payment.