If you have existing rental properties or plan to in the future, you may be wondering whether you can leverage this income to qualify for your next mortgage.
While there’s a lot to it, the short answer is yes—and this can be a crucial tool for investors seeking new opportunities.
In this article, we’ll discuss how an experienced hard money lender like Park Place Finance can help borrowers successfully leverage their rental income for future investments.
Start your application with Park Place FinanceCan you use rental income to qualify for a mortgage?
Yes, you can use rental income to qualify for a mortgage—especially for investment properties.
When evaluating your ability to repay the loan, hard money lenders will consider rental income as a part of your overall income.
They will evaluate your actual vs. predicted income and use various formulas to determine your income based on the total rent you receive and expense adjustments.
To prove these figures, borrowers must supply documentation.
How lenders view rental income for mortgage applications
Lenders view rental income as an essential factor in your mortgage application.
Let’s look at how they evaluate this income to determine approval.
Revenue and performance
Consistent rental income proves your properties generate a positive cash flow, which can be used to cover future mortgage payments.
Lenders will consider your properties’ current and historical performance to ensure they produce a reliable income stream.
Adjustments for vacancies and maintenance
Lenders typically do not consider 100% of the rental income because they need to account for potential vacancies and unexpected maintenance or repairs.
Instead, they will often use around 75%-80% of the gross rental income to account for these factors.
Impact on loan terms
Your rental income can boost your chances of loan approval and justify a higher loan amount or more favorable rates or terms.
Key metric for DSCR loans
Debt service coverage ratio (DSCR) loans focus on a property’s ability to cover debt obligations.
DSCR is calculated by dividing the net operating income (NOI) by the total debt service.
Your rental income is an essential factor in calculating DSCR.
Park Place Finance accepts a DSCR as low as 0.75, but a higher figure demonstrates a greater ability for your income to cover your debts.
Documentation and verification for using rental income for mortgage
If you intend to use rental income to qualify for your next mortgage, you’ll need to prove it with proper documentation.
Lenders may request some or all of the following documentation:
- Current lease agreements
- Previous lease agreements (if applicable)
- Bank statements
- Profit and loss statements
- Expense receipts
- Service contracts
- Vacancy and maintenance reserves
The exact required documentation will vary by lender, so be sure to discuss what you need to provide ahead of time to prevent delays.
Factors affecting the use of rental income
Lenders will evaluate several factors to determine the stability and reliability of your rental income, including:
- Previous vacancy rates vs. market vacancy rates
- Duration and terms of lease agreements
- Property location
- Borrower’s experience
- Local economic conditions
An experienced hard money lender can rapidly evaluate these factors to decide your unique borrowing scenario.
Overall, they just need to verify that your rental income is consistent and sufficient to cover your new mortgage, and each lender will request slightly different documentation to prove it.
The best action for investors is to work closely with a private lender you can trust who has experience leveraging rental income for future mortgages.
Tips for maximizing rental income for loan qualification
Your rental income can help you qualify for various types of loans.
Consider the following strategies to help you maximize your rental income for loan qualification.
Keep detailed records
Your documentation is critical to your loan approval.
Keep detailed and accurate records of all rental income, including lease agreements, rent rolls, and bank statements showing rental deposits.
Additionally, make sure that all your numbers across your documentation match. This step will help make the loan process as quick and smooth as possible.
Consider professional property management
While some investors enjoy being landlords for their properties, this can sometimes become too much and affect a property’s appeal and occupancy rates.
Professional property management can handle tenant screening, rent collection, and maintenance to ensure that your property is well-maintained and consistently attracts tenants.
Keep your property updated
Property upgrades and renovations can help you justify higher rental rates and attract and retain tenants.
Consider current market trends and tenant desires when applicable to cater to your target prospects.
Reduce vacancy rates with flexible terms
Based on local trends and desires, carefully consider whether long-term leases or more flexible leases will benefit your properties.
Long-term leases with reliable tenants will produce predictable rental income, but flexible lease terms will attract those with specific housing needs.
Use technology
Property management software that automates rent collection will help ensure that your tenants pay on time.
Additionally, consider using an online system to fulfill maintenance requests.
How to calculate your rental income
Before applying for your next mortgage, you’ll want an accurate understanding of your rental income that considers your expenses and leaves room for potential vacancies.
Let’s briefly go through the steps for calculating your rental income.
- Gross rental income: Add up the monthly payments you receive from all tenants and multiply by 12
- Adjust for maintenance and vacancies: If you want to adjust for potential vacancies as a lender would, use 25% and multiply by your gross rental income (for example, a gross income of $36,000 x 0.75 = $27,000)
- Calculate your NOI: Using your adjusted rental income, subtract your operating expenses
- Calculate DSCR: Divide your NOI by your total debt service
These calculations can help you prepare to work with your lender and confidently move forward.
Apply for a loan with Park Place Finance
Park Place Finance is your trusted hard money lender, with over $1 billion in loans funded over its 17-year history.
But don’t just take our word for it—check out what our clients say about us.
If you’re ready to use your rental income for your next mortgage, we can help.
To speak with an account executive now, fill out our quick online form or call (866) 407-1599.