Investment That Can Ruin Your Chance for a Mortgage
Scott Sheldon | Credit.com | May 30, 2014 | link
Do you own a rental property? If yes, and you’re looking to get a new mortgage, your gain or loss identified by your tax returns may help or hinder your chances.
Lenders can use up to 75 percent of the rent generated on your rental property as income to help you qualify for a mortgage. However, if there is a history of rental losses, those losses may limit your borrowing power. Here’s what you should pay attention to if you have a mortgaged rental
Own more than four financed properties? Some lenders may not be willing to lend to you, and others may charge a pricing premium.
property and want to buy another home.
Know Your Schedule E: The schedule E of your Form 1040 is the area of your personal income tax return where you report rental property. If, at the end of the calendar year, you have a net loss on your property for your tax return, you could face a tough time qualifying for a mortgage because the loss is counted as a liability, much like a minimum payment is on a car loan, credit card or other consumer debt.
Lenders will usually average a two-year history for each rental property owned. An averaged gain or loss from the Schedule E will determine if you cut the mustard for qualifying.
How a Lender Sees Your Rental: For each rental property, it’s not as simple as using gross income to offset a mortgage payment (comprised of lender payment + taxes +insurance; here’s a good way to figure out what your monthly housing budget should be). The other factors that come into play for carrying a rental property include maintenance expenses as well as depreciation, which is required on rental properties. This is especially important if the rental property was your primary residence at one point and has now been converted into a rental property. The depreciation schedule will specifically delineate at what point in time the property became a rental, which is crucial for the lender to consider income generated.
Here is the special formula lenders use to determine if your rental property is a liability against your income, using the annualized figures from Schedule E on your 1040: Gross rents + taxes + plus mortgage interest + insurance + depreciation + homeowner’s association dues (if applicable) – total expenses divided by 12 = net gain or loss
The lender will look at these numbers for the past 24 months and this formula will be performed for each rental property you have whether or not there is a mortgage on that particular property.
Mortgage Tip: If any rental property is free and clear of any mortgages, there is almost always a net gain — resulting in more useable income for the loan.