Is it hard to get pre-approved for primary residence with rental properties?

[shanaling]

If you invested in multiple rental properties (i.e. more than five 100k properties with 20% down), how hard is it to get pre-approved for primary residence? I live in California, so I would be looking at a home priced at ~500k.

FYI: I do have W-2 income from full-time job, and I'm only looking at rental properties that have a positive cash flow.

Thanks in advance!

[holicanmc]

I don't have 5 investment properties but I have 1 and recently bought a primary residence and another investment property in the same transaction so I'll chip in with some info from my latest experience. One thing lenders look at is your debt-to-income ratio:

Monthly Income = (Gross) W2 plus all rental income. I was not able to include potential rent from the new IP in this number.
Monthly Debt = all mortgage payments including tax + insurance plus any other non-housing loans/revolving credit payments
The lower this percentage is the better, I think they like to see it below 36% these days.

My lender also required I have 6 months of expenses for the 2 investment properties in cash. I couldn't use those funds for downpayment or anything else before closing, they had to just sit there.  I didn't find this out until near to closing so this almost tanked the deal since I just barely had enough cash on hand for downpayments/6-month reserves.

[zinethstache]

+1

I am not sure about your primary residence, a broker can clarify on that.

[LadyMaWhiskers]

In my experience, the underwriting guidelines will consider 75% of the net rental income, as shown on 2 years' tax returns. If the rental income is newer than that, I think the underwriting becomes more nuanced, but it can still be used.

Debt-to-Income ratio will be a key factor. So in some sense, the income properties may "count against you" because of the debt they carry. The income will add to your income, but only at 75% of the net that you have reported.

Notice, this make it critical to be forthright on your tax returns if you intended to continue with leveraged acquisitions, including a primary residence.

[zinethstache]

note when you fill out the application, your mortgages and the offset of them with the rental income goes in a different section of the application than the Debt details.

If you've already landed 5 mortgages, I believe it will all be entered the same way and depending on your other debt, you should end up with well under the 36% or so DTI that is the max Underwriters will consider. (I assume this since you are also claiming W2 income.)

[Jack]

Isn't there a limit in the number of mortgages you're allowed to have in your name (at least with "normal" underwriting), and isn't that limit four?

[Gr8ful]

holicanmc is right on.

You will be qualified on your W2 earnings as well as the earnings from your rentals.  You will also be hit with the payment for all the mortgages as well as any personal debt you carry.  If you have Schedule E's you should be able to use actual profit and loss of the properties, if you have  not filed on a property you will be looking at 75% of gross for that property.

You will also need to show reserves for all the mortgages you have (usually 6 months) that you can show the lender. 

Unfortunately most lenders interpret Fannie or Freddie's guidelines differently, but a good broker should be able to look at you info and find the best lender for you.

Some lenders will have issue with 5 properties but there are plenty that will go over that number.

[andyp2010]

Non US person here but I just told the bank it was for investment, the numbers stacked up for them and then after I'd refurbished it I just 'decided' to move in. They don't really care unless you stop paying your mortgage.

[LadyMaWhiskers]

holicanmc is right on.

You will be qualified on your W2 earnings as well as the earnings from your rentals.  You will also be hit with the payment for all the mortgages as well as any personal debt you carry.  If you have Schedule E's you should be able to use actual profit and loss of the properties, if you have  not filed on a property you will be looking at 75% of gross for that property.

You will also need to show reserves for all the mortgages you have (usually 6 months) that you can show the lender. 
 
Unfortunately most lenders interpret Fannie or Freddie's guidelines differently, but a good broker should be able to look at you info and find the best lender for you.

Some lenders will have issue with 5 properties but there are plenty that will go over that number.

In my experience, the 75% is of net. So you subtract your actual expenses (which would include principle reduction, but not vacancy) and then 75% of that is added to the income side of your income statement.

[EAL]

We invest in rentals and work full time in addition. We currently live in a home we are paying a mortgage on and rent one out.  We are in the process of buying a property with a front house, which we will live in, and a back house with an upstairs and downstairs apartment.  First of all, talk to a great mortgage broker, ours has been so helpful in answering questions.  I will do the best I can with what I know.  IF you are a property investor, they will want to see that you have more in reserves, as issues may arise that you'll need to pay for.  In addition, an income property must show up for 1 to 2 FULL year on your tax return to prove you are gaining and not losing money on it before a mortgage company will let you count that as income. For example, our mortgage on our rental is $680 and we rent it for $1000 a month. We just have to eat that $680 and it counts as debt because we've only had it since May of this year. The $1000 in income a month was not counted by the mortgage broker when he did our debt to income ratio but he of course counted the monthly mortgage payment as a debt payment. This simply means, if you want to buy your primary home after buying rentals, you need to plan to have them for a few years first so they can show up on your tax returns or have more cash for a down payment as you'll likely get approved for a smaller loan. Also, after you have income properties paid down a bit, if you chose, you could use the equity to help purchase your next home.

www.mindfulmoneymatters.com

[SwordGuy]

If you bought your properties for cash, i.e., no debts on them, and you don't need the rental income to qualify for the loan, I wouldn't mention them at all. 

Just make sure your rental income doesn't hit the account you will be using to prove you have the down payment money and cash reserves.  Get that account ready so you have 2 months of statements before you apply for the mortgage.

Otherwise, you'll have to supply information about the property, copies of insurance policies on them, and other wastes of your time.

[arebelspy]

If you bought your properties for cash, i.e., no debts on them, and you don't need the rental income to qualify for the loan, I wouldn't mention them at all. 

They'll ask about properties you own, and not mentioning them is mortgage fraud.

The bank has a right to know, because they're issuing you credit and need to know your liabilities. A rental, even one with no mortgage, has costs (property taxes, insurance), and potential legal liabilities if you get sued.

[SwordGuy]

If you bought your properties for cash, i.e., no debts on them, and you don't need the rental income to qualify for the loan, I wouldn't mention them at all. 

They'll ask about properties you own, and not mentioning them is mortgage fraud.

The bank has a right to know, because they're issuing you credit and need to know your liabilities. A rental, even one with no mortgage, has costs (property taxes, insurance), and potential legal liabilities if you get sued.

If they ask I would, of course, tell them.  But I would no longer volunteer.

[clarkfan1979]

In my experience, the underwriting guidelines will consider 75% of the net rental income, as shown on 2 years' tax returns. If the rental income is newer than that, I think the underwriting becomes more nuanced, but it can still be used.

Debt-to-Income ratio will be a key factor. So in some sense, the income properties may "count against you" because of the debt they carry. The income will add to your income, but only at 75% of the net that you have reported.

Notice, this make it critical to be forthright on your tax returns if you intended to continue with leveraged acquisitions, including a primary residence.

I agree with this above. You typically need 2 years of rental income on your taxes to count as income and not as a liability. I have also found that most banks count 75% of the income above your mortgage to account for repairs and vacancy.

[CashFlowDiaries]

The lender I use counts 75% of the rental income on the house that I am buying as long as I can provide a signed lease agreement prior to closing.   I dont think this is normal at all though with other lenders and I have been working with my lender for awhile now so maybe that has something to do with it.