Rental Income When Relocating

What do you when you are relocating to a new city and you are trying to qualify for a new home loan when you already own a home?  More specifically, what are your options if you plan on keeping your old home and turning it into a rental property?  Can you use that rental income to offset the existing mortgage payment on your old property to help you qualify for a new FHA, VA or Conventional mortgage?  The answer depends on what type of mortgage you are using to finance your next home purchase.  Let’s break it down loan type by loan type:

Can You Count Rental Income?

I have great news!  Some borrowers can include rental income on a property they are vacating due to a relocation.  As they say “the devil is in the details” so read on!

Using Rental Income When Relocating

FHA Relocation Rental Income Mortgage Rules

FHA mortgage guidelines allow a home-buyers to use rental income received on a property that they previously occupied and then relocated away from.  There are a few very specific guidelines that must be met in order to utilize income in this situation:

1. The buyer must relocate to a marketplace that is NOT within reasonable commuting distance from the home that is being converted into a rental property.

2. A copy of the rental lease must be provided

3. Evidence of the security deposit and evidence that the first month’s rent was paid to borrower

Calculating the income: The most important thing after meeting both of these requirements is to figure out how much income can be included in the borrowers application to offset the mortgage payment on the home that the borrower lived in prior to their relocation.  You guessed it, there are special mortgage rules for that too! FHA calculates rental income in this case as follows:

1.  The borrower may add rental income equal to the amount of income  on the lease agreement minus the appropriate “vacancy factor” based on regional HOC assignment.

This may sound complex however it breaks down rather simply.  First, let’s discuss vacancy factor.  A “vacancy factor” is a way that mortgage lenders account for the possibility that a rental property will vacant for any given period of time and it is expressed as a percentage (for example if a vacancy factor equals 15%, that means that the lender is going to assume the property would be vacant for 15% of the year).

The second piece of the rental income calculation when considering income on a property that was recently converted to a rental as a result of a relocation is determining the appropriate vacancy factor.  FHA does this in a unique way.  Throughout the United States, HUD/FHA maintains 4 “Home Ownership Centers” or what  we in the industry affectionately refer to as “HOC’s.”  HOC’s are like regional call centers for FHA mortgage questions/regulations and the vacancy factor that FHA uses for rental properties is dictated by which HOC region a rental property is in.  Here are the factors broken down by HOC region:

ATLANTA: 15%
DENVER: 25%
PHILADELPHIA: 15%
SANTA ANA: 15% (Arizona is in this HOC region)

Follow this link to determine what HOC region your property falls in: HOC REGIONS

Now how does this all boil down to an income number?  Let’s use an Arizona case study.

Facts:  1.  Arizona falls into the Santa Ana HOC/Vacancy factor – 15%  2. Vacated House Rents for $1,000/mo   3. Buyer provided a lease agreement and documentation that 1st months rent and security deposit were received

Calculation:  $1,000/mo rent  x’s  85% (this is 100% minus 15% vacancy factor) = $850 Net Rent

The Net Rent of $850 in this scenario can be used as income AND to offset the mortgage payment that this borrower has on a property that they are relocating away from and renting out.

VA Relocation Rental Income Mortgage Rules

VA guidelines also allow for the inclusion of rental income when a borrower relocates away from a home they own and they turn it into a rental property.  VA’s rules for using rental income in this type of scenario are fairly straight forward.

1. The buyer must relocate to a marketplace that is NOT within reasonable commuting distance from the home that is being converted into a rental property.

2. Buyer must obtain a copy of a fully executed lease agreement.

3. The rental income cannot be used as additional income and may only be used to offset an existing mortgage/property tax/homeowner’s insurance/HOA payment total on the house being relocated away from and turned into a rental.

Calculating the income: The way the VA calculates the income is by taking the gross rental income shown on the lease and deducting a 25% vacancy factor from it (see definition of “vacancy factor” above).

Calculation : A gross monthly rental income of $1,000 x 75% (100% – 25% vacancy factor) = $750 Net Rent

The Net Rent of $750 in this example could be used to offset the mortgage payment on a VA mortgage application however it could not provide additional income above and beyond offsetting the existing housing payment on the veteran’s previous/now rental property.  For example, if the mortgage payment on the home is $1,000 the $750 can be used to offset that payment so that the borrower only has a -$250 per month debt held against them rather than -$1000 (the full mortgage payment).  On the other hand, if the mortgage payment was $500 per month, only $500 of the $750 Net Rent could be used to “zero” out the borrowers existing mortgage payment.  The borrower could not get credit for the additional $250 in rental income as income to help them qualify.

Conventional Relocation Rental Income Mortgage Rules

Conventional mortgage regulations are much more restrictive when it comes to allowing rental income on a property that was turned into a rental as a result of a relocation.  The only way that rental income can be included on a Conventional home loan application in this scenario is if the buyer can document (with a full appraisal) that there is 30% or more equity in the home being converted to rental AND the borrower can provide:

1. An executed lease agreement.

2. Proof that a security deposit and first months rent have been received.

For example: if a borrower owns a home that the owe $200,000 on they must prove that the home is worth at least $286,000 (30% equity). They would also be required to show that they moved  far enough away so that a commute from their previous home and their new place of employment would be considered unreasonable.  If they met both of these conditions as well as condition number 2 above they could use rental income to offset an existing mortgage payment.

Calculating the income:  On a Conventional loan, the rental income in an eligible “relo” scenario is determined using a 30% vacancy factor (see definition of “vacancy factor” above).

Calculation: A gross monthly rental income of $1,000 x 70% (100% – 30% vacancy factor) = $700 Net Rent

Including “Relo” Rental Income Is a Matter of Circumstance and Loan Type

As you can see, there is no “one size fits all” way to determine whether rental income can be used to offset the mortgage payment on a property that is being relocated away from and turned into a rental.  The great news is that there are options and ways to include that rental income on a new home loan application to help a buyer qualify for a mortgage in their new hometown!

If you are relocating and  have any questions about qualifying for an FHA, VA or Conventional mortgage call or email us today.

By Jeremy House
Google

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