How To Use Rental Income to Qualify for Mortgage: Full Guide

The US has one of the largest real estate markets in the world, with an estimated worth of $2,53 trillion in 2023. Because of this, it’s no wonder that many investors, both domestic and foreign, are looking to get a piece of that very large pie. Thanks to the highly developed financial services market, investors from all around the world are finding new and creative ways to purchase rental property in the US. And one of those creative ways is using rental income to qualify for mortgage.

In this article, we’ll talk about rental income mortgages, what types of rental income lenders will consider, and how to calculate them. We’ll also share with you a couple of ways you can prove your rental income for a loan, what sort of documents you’ll need, and what types of properties you can finance with rental income mortgages.

Let’s begin!

Is It Possible to Use Rental Income to Qualify for Mortgage?

The answer to this question is a resounding — YES, you can use rental income to qualify for a mortgage. The US has an advanced financial system, which includes countless mortgage lenders and many types of investor loans available for foreigners and residents alike. And a lot of mortgage lenders will allow you to qualify for mortgage with rental income.

In most cases, the salary or wage of a potential investor doesn’t tell the entire story of their financial situation and economic potential. When that’s the case, lenders will always look at any other assets investors can bring to the table to prove their ability to repay the loan.   

The main concern mortgage lenders have is whether or not you have enough income to cover the monthly payments and eventually repay the loan they gave. They are not bothered as much by the source of that income as long as it’s legal. 

By giving investors an opportunity to use rental income to qualify for mortgage, lenders can accomplish three main things:

• Increase the amount of investors that can meet the requirements for a mortgage
• Mitigate the risk for themselves 
• Make more money

With that out of the way, let’s move on to the next part of the article, where we’ll share how you can start using rental income to qualify for a mortgage.

How to Start Using Rental Income to Qualify for Mortgage?

Before anything else, we must tell you that mortgage lenders are different. Meaning that the exact requirements to get a loan based on rental income will differ from one lender to another. That’s why it’s important to talk to as many lenders as you possibly can and discuss loan eligibility criteria with each of them until you find the one that’s right for you.

We can help you connect with rental income mortgage lenders all across the US.

Now, to allow you to start using rental income to qualify for a mortgage, lenders will first look at what exact type of rental income you want to use.

Using Rental Income to Qualify for Mortgage: Two Types of Rental Income

There are two main types of rental income lenders will accept as qualification for mortgage loan approval. They are:

• Actual or real rental income — This type of income means that you’re already a landlord who owns a rental property and has a rental agreement with a tenant. You can use the documents that show the amount of money your tenant is paying each month (rental income) to qualify for mortgage.
• Projected or future rental income — This type of rental income is for when you want to use the mortgage loan to purchase a property and then rent it out. The main idea behind this is to get the lender to finance your property and then get the tenant to pay off the entire loan while you sit back, relax, and gain equity with each month’s rent. 

Depending on which type of rental income you end up using to qualify for mortgage, you’ll have to go through different steps to prove it. 

How to Prove Rental Income for a Loan?

As we’ve said above, there are two main types of rental income you can use to qualify for mortgage. But before you do so, you need to find a way to prove the type of rental income you want to use. Here’s how you can do that: 

How to Prove Real Rental Income to Qualify for Mortgage?

This type of rental income is actually really easy to prove as all you will need are two things:

• Copy of the rental agreement with your tenant (lease agreement)
• Documents that prove your tenant is actually paying the agreed-upon rent (i.e., bank statements, receipts, and similar)

How to Prove Projected Rental Income to Qualify for Mortgage?

Before you can use projected rental income to qualify for mortgage, you need to contact a certified appraiser who will fill out the 1007 appraisal form and determine the potential rent schedule. We should say here that this process can take a while, depending on the exact US state the property is located in. For example, in Texas, property appraisals can take anywhere from one to four weeks. So, make sure to note that the process of proving projected rental income to qualify for mortgage can be a lengthy endeavor, and prepare accordingly. 

How Do Lenders Calculate Projected Rental Income?

Calculating projected rental income to qualify for mortgage is not as straightforward as using monthly rent as proof of income to become eligible for the loan. There’s a bit more to it. Because every property comes with set costs, lenders will look to account for and subtract them from the monthly rent. The number that’s left is the amount of money lenders will use as the “projected income” to determine whether or not to approve a loan application. 

To calculate projected rental income, you should perform the following set of calculation:

(Monthly Rental Income x 75) / 100 = Adjusted Rental Income 

Adjusted rental income is essentially 75% of the monthly rental income value. The calculation considers the different types of costs (e.g., vacancies, maintenance, property management, etc.) and subtracts them from the monthly rental income. But that’s still not it. The next step is to calculate the Qualifying Rental Income (or the rental income that the lender will use to evaluate your loan application). To calculate that, you should:

Adjusted Rental Income – (Monthly Loan Payments + Property Taxes + Other) = Qualifying Rental Income

To make things clearer, if the above seems too complicated, let’s give you an example with some actual numbers so you can see for yourself the whole process of how lenders calculate projected rental income.

Using Rental Income to Qualify for Mortgage: Example of Calculating Projected Rental Income

Let’s say an investor named John wants to finance a rental property via a rental mortgage loan. He got the property appraised by a professional and received a 1007 form, which approximates the rent at around $2,400 per month. Let’s also say that based on the property’s value and the mortgage estimate that John got from the lender, the monthly loan payments should be around $1,200. Property taxes for an average home will come out at around $2,500 per year, or just around $210 per month. And we’ll include around $150 for unexpected monthly costs (or Other in our calculation).

So, in order to see if John can get a rental income mortgage, we need to calculate the Qualifying Rental Income. Let’s do just that:

(Monthly Rental Income x 75) / 100 = Adjusted Rental Income 

($2,400 x 75) / 100 = $1,800

Then, it’s time to calculate:

Adjusted Rental Income – (Monthly Loan Payments + Property Taxes + Other) = Qualifying Rental Income

$1,800 – ($1200 + $210 + $150) =  $1,800 – $1,560 = $240

And that’s it. Because the Qualifying Rental Income is greater than 0 (or $240 in this case), John will more than likely get approved for a rental income mortgage. 

The most important thing about Qualifying Rental income is that it doesn’t go below zero. As long as the property is generating income, even if it’s not much, you, as an investor, will keep gaining equity in the property with every rent payment. And the best part is that your loan will be repaid by your tenants. 

We can help you with getting a rental income mortgage loan.

Using Rental Income to Qualify for Mortgage: Main Things to Know 

Every rental income mortgage lender is different and will have their own loan requirements. For them, it’s all about managing risk; they will always look for avenues to do just that. However, certain aspects of rental income mortgage requirements could be considered as industry standards. So, before you even start with the process of getting a loan based on rental income, you should familiarize yourself with the most common of those requirements.    

Rental Income Mortgage: Down Payment 

As we’ve mentioned above, lenders that will give out a mortgage based on rental income can set different loan requirements. When it comes to most types of investment loans, including rental income mortgages, the down payment will be in the range of 20-25%. 

One important thing to note about a down payment is that it can affect all other aspects of the loan agreement. For example, if you pay more in down payment, you can probably negotiate a lower interest rate, and so on. Because of that, it’s a good idea to ask for at least two estimates from each lender you contact — one for the down payment of 20% and one for 25%. That way, you’ll have more options to choose from and can ensure you get the best possible deal. 

Rental Income Mortgage: Interest Rate 

Interest rates for rental properties are around 0,5-0,75% higher than they are for financing main residences. For a rental income mortgage, you can expect to pay an interest rate between 7-9%, depending on various factors, such as a down payment, length of the loan agreement, and more.

Rental Income Mortgage:Credit Score 

A lot of rental income mortgage lenders will require you to have a US credit score of at least 600. On the other hand, it’s important to mention that many lenders won’t require you to have a credit score in the US at all. It will all depend on your exact situation and the lender you’re negotiating with. The US financing market is large and was created with the idea of accommodating as many different types of investors as possible. 

Rental Income Mortgage: Required Documents

To qualify for a rental income mortgage loan, you’ll more than likely need to provide documents that show your income, assets, credit history, credit score, and similar. It’s important to note here that the exact documentation you’ll need will depend on the lender. But, for the most part, to get a rental income mortgage loan, you should prepare the following documentation:

• Identification documents (ID card, passport copy, etc.)
• Documents that serve as proof of income (pay stubs, job statements, tax statements)
• Credit history 
• Information about the property you are looking to finance (value, projected rental income, etc.)
• Proof of down payment (usually between 20-25% of the property’s price)

Types of Properties You Can Finance With Rental Income Mortgage

Rental income mortgages are mostly for financing properties that can generate revenue (i.e., rental income). The exact type of property you can finance with rental income mortgage can vary based on the specific lender. Some lenders may have their own preferences and might exclude certain types of properties. But, for the most part, with rental income mortgage, you’ll be able to finance the following property types:

• Single-family homes
• Multi-family homes (duplex, triplex)
• Condominiums (single units or apartment buildings)
• Vacation or short-term rentals (including Airbnb investing) 
• Various commercial properties (office spaces or buildings, industrial complexes, etc.)

FAQ

Does rent count as income for mortgage? 

Yes, a lot of mortgage lenders in the US will allow you to start using rental income to qualify for mortgage. Due to the highly-developed US financial market, counting rental income for mortgage is done by a lot of lenders. The common name for this type of loan is rental income mortgage, and it is often used by investors to finance various types of investment properties. 

What percentage of rental income can be used for mortgage?

The industry’s standard is that 75% of the total rent amount can be used to apply for a rental mortgage. However, it’s important to note that every rental mortgage lender can have their own requirements. Meaning that some of them might go lower while others could go higher, depending on the exact situation.

Can you use future rental income to qualify for a mortgage?

Yes, you can. Many lenders will accept using rental income to qualify for mortgage. 

Want to Start Using Rental Income to Qualify for Mortgage? We can help!

NRI is a one-stop solution for  domestic and nonresident investors who want to buy property in the US. We offer different services throughout the buying process and can help you find international mortgage lenders to provide you with a loan based on rental income (current or potential). Our team of professionals will ensure you get multiple offers for property financing and will help you go through them and choose the one that best aligns with your goals as an investor. 

If you want to invest in US property and start using rental income to qualify for mortgage, NRI is the perfect place to start your journey! Book a free call and see for yourself how we can help you!