Are you thinking of purchasing a second property but are worried that your income may not be enough to qualify for a second mortgage loan? One solution many people want to consider is using rental income from the property you plan to purchase to help you qualify for the new mortgage. The trick will be using Rental Income from a vacation home, if you are planning to use the property for short term rentals (STR).
Short Term Rental History, like AirBNB or VRBO – might make a second home more valueable. Many people do Short Term Rentals the last year they own a property jsut to have that history when they go to so. However, if you are using RENT to qualify, we are going to treat it as Investment Property.
The traditional purpose of owning a second home for family getaways has been replaced by a desire for rental yields according to a new survey.
Two thirds of second home / vacation home owners now rent them out for all or part of the year, to make a return on their investments. Using rental income to qualify for a mortgage loan can be a great way to offset the costs of owning a property, especially if you plan to rent it out. However, it’s important to note that Fannie and Freddie Mac have different rules and requirements for using short term rental income vs long term rental income to qualify for a mortgage loan.
This marks a shift from less than 20 years ago when 8 out of 10 owners of second homes never rented them to travelers, a survey by vacation rental firm HomeAway revealed.
“In a low interest rate environment, investors were seeking out income generating assets,” says Paul Tostevin, associate director, Savills world research. “Today’s second home buyers want properties to work for them financially and they are increasingly looking not just to cover costs but to turn a profit.” With mortgage rates moving higher, this is becoming more of a challenge.
Additionally, changes within the Fannie Mae and Freddie Mac guidelines requires second home buyers to put more cash into the transaction. Can you still purchase a “true” second home with only 15% down payment? Sure, but your rate will be much higher. The best down payment for a second home is 45%, if you are looking for the lowest interest rate.
Using Rental Income From a Vacation Home To Qualify
It’s important to recognize what we are actually talking about here. IF you are buying a Second Home – we can’t use Rental Income to Qualify you for a mortgage. Think about that for a minute. If it’s a SECOND HOME, then it should not be rented out. It’s a HOME, not a rental property. So you would NOT be using income to qualify for a Second home.
If it’s an Investment Property – then it’s a different story. With an Investment Property that has Short Term Rentals (we wouldnt have a lease) THEN we can take the Rent Schedule (on a FNMA Loan) from the Appraisal and use THAT to qualify you for the property. With this scenario, you are paying the highest interest rate, because it’s an Investment Property.
If you ALREADY Own a Vacation Home that you are renting out, then you can call it a Vacation Home, or a Second Home, it won’t really matter. We can take the income you are reporting on your tax return for the last 2 years and use approximately 75% of that income to help you qualify for another home.
When using rental income from an “already owned” Vacation Home to qualify, you must ensure that the rental income is reliable and sustainable. If you’ve owned a property for 2 or 3 years, this should be easy to do. You can provide us with proof of rental income (normally from a tax return), or a lease agreement, rental application, or rental history. You may also need to provide proof of any expenses related to the property, such as property taxes, insurance, home owner association documents and maintenance costs.
“In 2021 a third of all owners cover costs with rental income, and another third made a profit. The average gross yield across the sample stands at 6.4%, or 3.9% after costs, but excludes taxes.”
Those numbers will likely be much different for those who are purchasing a Second Home/Investment Property in 2023 and are using Rental Income from a vacation home to add profits to their family income stream.
Another factor that lenders may consider when using rental income to qualify for a mortgage loan is the occupancy rate of the property. If the property is vacant or has a high vacancy rate, lenders may not consider the rental income when qualifying you for a mortgage loan. It will be treated almost like owning a business. If you made loads of money in 2020 and 2021 – but you made less in 2022, and it looks like bookings are way down for 2023, it will be seen as declining income. Not all underwriters are going to count declining income.
Additionally, if you are shoping around for a mortgage loan, it’s important to remember that different lenders may use different methods to calculate rental income. We use the actual rental income from the property, and back out expenses like maintenance, taxes, homeowner dues, or flood insurance. Others Lenders may use a percentage of the rental income. Most lenders, including us, are looking for at least a two year rental history.
It’s important to discuss the specific rules and requirements with us to ensure that you understand how the rental income from a vacation home will be used, especially if you are using the property for short term rentals (STR). Those properties are treated with more scrutiny than a long term rental. We have seen clients purchase a second home, but rent it out for 3 and 4 months at a time, to build up the rental history for the property.
Finally, it’s important to remember that using rental income to qualify for a mortgage loan may come with some risks. If the property is not rented out or the rental income decreases, you may have difficulty making your mortgage payments. It’s important to have a backup plan in case you are unable to rent out the property or if rental income decreases.
If you have questions about Rental Income from a Vacation Home, and you are looking for the BEST Mortgage Rates – please call Steve and Eleanor Thorne, 919-649-5058. We are Professional Mortgage Planners with over 20 years of experience in NC Mortgage Lendeing!
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