Rental income is one of those iffy types of income. Some loan programs allow it at its full value; others discount it; and yet others just don’t allow it. Luckily VA loans are among those that allow it in certain situations. Typically income from rent is used when you purchase a multi-unit property, which is allowed on the VA loan as long as you occupy one of the units. There are exceptions to the rule, which we will discuss below.
Renting out a Multi-Unit
The most common scenario looks like this:
- You purchase a 3 or 4-unit property and you live in one of the units. As a veteran, you can use VA funding for this property and include the rental income as long as you can prove that you have a history of managing a rental property or that you have the necessary experience to be a landlord.
In order to qualify for the above situation, you have to meet the following requirements:
- You must have at least 6 months’ worth of the principal, interest, taxes, and insurance of the new mortgage in a liquid account.
- Proof of your prior history as a landlord or your employment history that would qualify you to be a landlord.
Qualifying the Rent
The VA guidelines allow you to use up to 75 percent of the rent you collect on the property as qualifying income. If the units were rented out before because it is an existing property, the amount paid at that time will be used to calculate the 75 percent total. If it is a new property, the appraiser will figure out the fair market value for rent in the area, of which the lender will take 75 percent of for your qualifying income.
Using Rental Income from Other Properties
If you own other properties that you rent out and are using the VA loan to secure a primary residence, you might qualify to use the rental income from those properties. In order to qualify, you will need to provide the following:
- Proof that you have at least 3 months’ worth of principal, interest, taxes, and insurance set aside for your mortgage
- Evidence on your last two years’ tax returns of receipt of income from rent. The lender may add back the property depreciation into the amount of income they can use to determine your rental income profit.
If the income can be considered stable and reliable, it can be used as effective income to help lower your debt ratio. If you do not have a prior lease or you cannot prove continual receipt of the income prior to the new VA loan, even though the rent is on another property not securing the VA loan, the income cannot be included in your qualifying income. You must be able to prove a history of the income in order to include it.
The determination regarding the use of income derived from rent will be dependent on the market. The appraiser will do a market research analysis to let the lender know what the rental market is like in the area. If there is difficulty with renting properties in that area, the income from rent will not be able to be used. On the other hand, if there is a solid rental market or the borrower has a history of receiving rent money regularly, the income may be able to be included.
The bottom line is that the lender has the final say and each lender might have a different answer. If you have rental income that you need to be used for qualifying income, shop around until you find a lender that is willing to let you use it.