-
Can You Use Rental Income for DTI on Two-to-Four Unit Multi-Family
On 4 UNIT Owner Occupied FHA loan. Can rental income of this 4 unit be used to reduce the Mortgage Payment.
-
1 Reply
-
The rental proceeds from the 4- permitted occupying the property can be considered when getting an FHA loan to offset the mortgage payment amount on the property. Here are some key points that should be appropriately shared:
Under FHA regulations, what qualifies as rental income
Occupancy Requirement: To qualify for an FHA loan, you, the borrower, must always inhabit one of the dwelling units.
Calculation of Rental Income: The lender accepts some form of rental income from the other three units, thereby increasing the owner’s debt-to-income (DTI) ratio and allowing any loan amount to be advanced in excess of that.
How is rental income determined?
Fair Market Rental: Lenders may utilize units’ fair market rental, which is approvable by rental comparables or rent surveys.
50% Principle: It is normal practice to take 75% of the potential rental earnings (for vacancies and maintenance purposes) to the figures utilized in the income calculations.
Documents: Documents such as lease agreements or rental history records may also be required to support the rental income.
Effects on the DTI Ratio
Rental income effectively reduces your Debt-to-income ratio (DTI), which gives you a better claim on the Mortgage loan. Though most lenders prefer the DTI ratio to be below 46.9% front-end and 56.9% back-end, considering the credit score and reserves, higher ratios may sometimes be allowed.
Considerations
History Tenant Occupancy: If you aren’t currently renting out the units, some lenders may require a rental income history of at least a year before they qualify you for the loan against them.
Supervision of Rentals: Management of rentals would mean managing the property and even potential vacancies while the operation is running.
Using rental income from a four-unit primary residence can be a good strategy for qualifying for the FHA subsidy and reducing mortgage payments. Always clarify your case with your lender and try to cover a point about how they will be using the rental income in your application. Should you require more information, do not hesitate to reach out again!