You find a rental property.
The rent is $3,000 per month.
That means the lender adds $36,000 to your income.
Right?
Not necessarily.
Rental income can help mortgage qualification.
But the method used to calculate that income can vary by:
- lender;
- mortgage program;
- whether the property is being purchased;
- whether you will occupy it;
- and whether it is an existing property in your portfolio.
That is why investors should understand the method, not just the rent.
Why lenders do not simply count the rent dollar-for-dollar
Rental properties have expenses.
Depending on the property, those can include:
- mortgage payments;
- property taxes;
- heating;
- condominium fees;
- insurance;
- repairs;
- maintenance;
- and periods without a tenant.
A lender therefore needs a consistent way to determine how much rental income helps support the application.
Different programs can accomplish that in different ways.
The gross-rent approach
Under CMHC’s current Income Property program for qualifying non-owner-occupied 2-to-4-unit rental properties, up to 50% of gross rental income can be used in one available qualification approach.
That does not mean every lender in every transaction uses exactly 50%.
It is an example of one recognized approach.
The important idea is that only part of the stated gross rent may be used.
The net-rental approach
Another method looks more directly at the economics of the property.
CMHC says lenders may use their own internal guidelines for determining net rental income—gross rents minus operating expenses—for the subject property and other residential investment properties.
This can produce a different result from simply adding a percentage of gross rent to income.
Owner-occupied properties can be treated differently
Suppose you buy a duplex and live in one unit.
That is a different situation from buying a duplex where you rent both units and live elsewhere.
CMHC’s rental-income guidance provides different approaches depending on whether a property is owner-occupied, non-owner-occupied, the subject of the application, and the number of units.
So before asking:
“How much rent will the lender use?”
clarify:
What type of property is this?
Will I live there?
Is this the property being financed?
Do I already own it?
Existing rental properties matter too
If you already own several rentals, lenders do not evaluate the new purchase in a vacuum.
Existing properties can bring:
- mortgage debt;
- rental income;
- taxes;
- property expenses;
- and other obligations
into the qualification picture.
The method used to calculate those existing properties can affect how much room remains for the next purchase.
That is why a strategy that worked on property number two may produce a different result on property number six.
What documents may support rental income?
Depending on the transaction and lender, useful documentation may include:
- leases;
- rent rolls;
- tax returns;
- statements of real-estate rental income and expenses;
- appraisal-supported market rent;
- property-tax information;
- mortgage statements;
- and other property-specific documents.
The exact requirements vary.
Do not rely on an unsigned rent estimate from a listing as though it is guaranteed qualifying income.
What about a property you have not rented yet?
A lender may sometimes consider expected or market rental income for a property being purchased, subject to the lender’s rules and supporting documentation.
That may involve an appraisal or other evidence of market rent.
Again, the question is not simply:
“What do I think I can rent this for?”
It is:
“What rent will the lender accept and how will the lender calculate it?”
Business owners with rental properties
This is where files can become particularly complex.
You may have:
- salary;
- dividends;
- business income;
- three rental properties;
- existing mortgages;
- and a new investment purchase.
Each income source and obligation has to fit into the same mortgage application.
On paper, you may have significant income and assets.
But the lender still needs a method it can use consistently.
The more moving pieces you have, the more important it becomes to understand the calculation before making the next purchase.
The takeaway
Rental income can help mortgage qualification.
But:
rent received ≠ income automatically added dollar-for-dollar.
The lender or mortgage program may use a percentage of gross rent, a net-rental approach, or another permitted calculation.
Understand that treatment before you decide what property you can finance.
Next step
Planning another rental purchase?
Understand how your existing properties, rental income and business income may fit together before making the offer.
General educational information only. Rental-income treatment and qualification vary by lender, mortgage program, property and borrower.