Would you buy a property if you knew someone else would be paying your mortgage – until the home is free and clear?
That’s what real estate investors aim for and achieve on a regular basis. If you want to do the same, you’ll want to know about the things your mortgage lender will look for.
One of the first things a mortgage lender will check out is whether you have any landlord experience. That means you can show that you’ve owned and managed investment property in the past. How does a lender do that?
Beyond looking at a previous or current rental agreement, the lender will look at your federal income tax returns for the previous two years, specifically Schedule E. Schedule E is where you list your interest payments, maintenance costs, depreciation and other real estate related expenses. To back up Schedule E, a credit report is reviewed to match up a mortgage with a rental property.
Why does a lender care want to know all of that? A lender won’t approve nor deny your application based upon having landlord experience but it will be more difficult to qualify for the new mortgage if you can’t provide evidence of such experience. How so?
If you need the rental income from a home you’re considering buying in order to qualify, without having previously owned and managed a rental property, the lender may not allow the income from the potential to count toward your monthly income. But check with your lender to find out. They may allow rental income on the new home to help you with qualifying.
In addition, a lender will typically require at least six months’ worth of house payments be in a cash account that you own. This reserve amount ensures liquidity while at the same time showing evidence there are enough funds to take care of maintenance and repair costs over the near term.
In essence, you have to qualify with your current house payment in addition to the new mortgage without the benefit of rental income.
On the other hand, if you can show that you own rental properties the lender will in fact use the income from the rental to qualify you. That’s a big plus and one of the reasons real estate investors have more than one rental in their portfolio. The lender is more likely to use rental income to qualify if you’re already a landlord.