Many people who want to get a mortgage may not know they can use rental income to sometimes qualify for the loan. This can apply to a property you currently own and rent as well as a property you are planning to buy and rent. Below is more information about how VRBO rental income works in 2024.
How Does a Mortgage Underwriter Calculate Rental Income?
When a property has a tenant, lenders typically consider a percentage of the income specified in the lease to estimate projected rental income. The standard practice is to use 75% of the total reported income, with a 25% deduction to accommodate potential vacancies and ongoing maintenance costs. This method ensures a more conservative projection, accounting for potential fluctuations in rental income due to factors such as tenant turnover and property maintenance needs.
Do Mortgage Lenders Use Airbnb Rental Income?
Yes. Fannie Mae Guidelines permit lenders to extend conventional loan offers that consider projected income from short-term rental platforms, which include, but are not limited to, popular travel sites like Airbnb and VRBO. Also consider Fannie Mae second home loans,
How Does FNMA Calculate Rental Income?
When utilizing existing lease agreements or market rents as documented on Form 1007 or Form 1025, the lender is required to determine the rental income by applying a calculation. This involves multiplying the gross monthly rent(s) by 75%, commonly known as “Monthly Market Rent” on the Form 1007.
Some mortgage companies will give the buyer the benefit of the doubt when you are buying a rental property with the idea to rent it out. This kind of mortgage financing is known as non-owner-occupied mortgages and it will cost you more than buying a primary home. You can generally expect to get a rate that is 20 to 35 basis points more than owner occupied housing.
If you have had a rental property for the last several years on your house and your new rental agreement is higher than the rental income you had in previous years, you will not be able to use the new income to qualify for another mortgage. The reason is that you do not have a history of getting this income.
Rather, the mortgage lender will usually do a rental property analysis. It will take into consideration the expenses, insurance, depreciation, mortgage and interest that is paid to banks. The net income that the lender determines in this calculation will decide how much the rental income will hurt or help your ability to borrow funds.
Note that if you want to get a mortgage, it is important that showing a big loss on Schedule E that shows income and losses from real estate can reduce your ability to get a mortgage. It will not stop you always from getting a loan, but it will be a factor in your debt to income ratio.
Some other things to keep in mind regarding rental property income and qualifying for loans include:
- Projected rents may be used by most mortgage lenders to offset the mortgage payment by as much as 75% of the fair market rent that is projected, which is determined by doing an appraisal when the property is bought.
- If you own a rental property for the last year, the lender will do an average of your expenses. This could affect your debt to income ratio and how much mortgage you can get.
- If you purchased a rental property in the past year but have not yet filed your tax return, you may use 75% of the fair market rents projected with a rental agreement. This will bypass the rental average that lenders use today.
It is important to note that how you report expenses on the Schedule E is the key to how much loan you can qualify for. Even if your property shows a loss, it may make sense to borrow money still. Keeping the property over the years can mean carrying forward your losses against taxable earnings in the future.
On the other hand, selling the property can give you extra funds that can allow you to buy another rental and minimize the rental losses you have in the process.
As always, a strong credit score always helps you to get a better and more affordable mortgage as you will get a better rate and terms.
The bottom line is that it is important to remember that you can buy a home when you have rental income. This is true for buying a primary home or buying another rental property. The key is to show that you are making a profit with the rental property income. Learn more about how to buy a investment property to increase your income.
Can I Use VRBO or Air BNB Rental Income to Qualify for Mortgage?
Yes, many mortgage lenders will accept your rental income as your primary income and grant your application for a home loan or refinance. Many other lending providers are mainly concerned with your financial situation and whether you can afford to make the monthly payments in a stable and risk-free way.
Mortgage lenders understand that some investors may not have any other source of income, such as a salary. If an investor receives a salary, it might be low or irregular and therefore not reflect their economic situation and ability to pay the debt.
By taking VRBO rental income into consideration to help investors access a mortgage, they’re acknowledging that every situation is unique and some situations don’t apply to every investor when seeking financing. Learn more about investment property loans.
As such, it’s important to understand the definition of rental income from a loan officer’s standpoint. It’s the rent you receive from tenants who live in a property you own. You can break it down into two types:
Actual income: This is the documented rental income that you receive regularly and is recorded on your tax returns. A loan officer can calculate and verify your actual rental income to help you qualify for a mortgage.
Subject income: Subject income is the estimated rental income you expect to generate from the property you want to acquire through financing. Lenders treat subject rental income differently from actual rental income.
In some cases, a loan officer can also evaluate your ability to pay off the loan based on evidence of past rental payments made on time.
References: Can Rental Income Help Me Get a Mortgage?