Buying a multi-family rental can be a good investment. You get a place to live and make money doing it. It’s a win-win situation for some people. The requirements for buying a multi-family property aren’t that different from a single-family property. The key is getting the lender to use your rental income for qualifying purposes. Not every borrower can do this. We help you learn how to make it work here.
Purchase a Small Multi-Family Unit
The best way to get a lender to use rental income on a multi-family unit is to purchase small. A 2-4 unit property doesn’t have much difference from a single-family property. This is in the eyes of the lender. They don’t pose a much larger risk than single-family homes. For this reason, they often use rent as a part of your income if you meet certain guidelines. If, however, you purchase a home with more than 4 units, the risk increases and your chance of using rent decreases tremendously.
Using Rental Income
So how do you get the lender to use your rental income? You have to document it. Let’s say you plan to live in one unit and rent out the other three. You should have an executed lease for the other 3 units. The lease should show the rent, lease effective dates, and due date for the rent. If you don’t have executed leases, lenders won’t let you use the rent. There is one exception, though.
If you are a landlord with experience, you may be able to use the
fair market rent for your area. Just how much experience you need depends on the lender. If you have had a rental or two before, it may not be enough. However, if you have many years of experience with rentals, a lender may assume you will successfully rent the units out.
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Do You Need the Rental Income?
You may not have to worry about the rental income being included if you don’t need it. First, consider the program you will use. If it’s conventional, you’ll need debt ratios around 28/36. If you’ll use an FHA loan, you have more flexibility. They require debt ratios around 31/43. If your debt ratio meets these thresholds without income from rent, you don’t need it to qualify. If your debt ratio is too high, though, you may need to find a way to include the rental income in your income.
Why Lenders Won’t Use the Income
As a basic rule, lenders look for income that is stable and will continue. They prefer income that should continue for the next 3 years. This isn’t always the case, though. Lenders won’t use projected rent because it’s not real just yet. No matter how legal the lease, it doesn’t mean anything until you own the property. This puts the lender at risk for loss if the rent income doesn’t occur.
Unless you have history renting properties out, you pose a risk to the lender. Being a landlord is a big job. Not everyone is cut out for it, though. If you find that you can’t keep up with the maintenance, it could pose a problem. If you incur a big loss as a result of renting out a property, you put the lender at risk. If this is your first time renting out a property, not too many lenders will provide you a loan if you need the rental income to qualify.
The best thing you can do is buy a property that you can afford on your own. This doesn’t only help with qualifying, but with protecting your investment. Purchase a multi-unit property that you can afford the mortgage without the help of any rental income. This way if your renters do default, you won’t find yourself in trouble.
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