Rental Income Requirements for Fannie Mae properties 5-10

[Investment Loans]

Rental Income Requirements on properties 5-10.

OK..just spoke to Fannie directly to clarify rental income

She said Fannie is definitely saying that if you own properties and want to be able to use income from them to offset the mortgages that you MUST have 2 years of tax returns.  If you dont, the full payments will be counted against you for all those units.

We also discussed the subject property rental income.  The announcement does not say what is required for rental income.  In the past, you could use 75% of the rental income after showing a 1 year lease.  The rep there definitely thinks that this is not so for properties 5-10.  So the subject property whether purchase or refi could not have rental income included in the calculation. 

This last part she was going to confirm when she meets with the credit committee this week.   I explained that the guidelines are very vague on these issues.  She thinks we should see a new update clarifying this soon.  Maybe after discussing more they'll see that this will be very tough for almost any investor.

- side note 1 - She also mentioned that there is not a 2 year landlord history for investors.  So if you're doing properties 5-10 and dont have 2 years tax returns for 1-4 and your income/assets fit the new qualifications you should still be ok.

- side note 2 - Fannie does not have a seasoning period for rate/term refinances or purchases.  Any lender having these has their own internal overlay.

[christopher w]

Ben,

That is great information. Thank you for posting it. I think my biggest question is what is the difference between having the properties on your tax return and haing landlord experience? Hopefully Fannie will come out with a supplement quickly because until then we are at the mercy of how an UW reads the announcement.

[Investment Loans]

She was definitely saying that if the borrower can qualify with all the mortgage against them and has the reserves that landlord history wasnt an issue.

Yes, I asked her to make this a point of clerification at their credit committee meating.  Anything to help the underwriters make the right calls.  As for now, I would just encourage underwriters to contact their direct seller rep.  This could be difficult if working with a lender that is not a direct seller.

[LandmarxProps]

Let me get this straight.

1. You need two years of tax returns showing rental history, but do you have to own each property two years in order to use rental income?

2. If you already have a house rented out and you do a rate/term refi with Fannie can you use 75% of that income even if it was recently rented out? I thought this is how it was always done.

[Investment Loans]

1.  Your first question doesn't make sense.  If you had your last 2 years tax returns which showed the rental income them obviously you would have owned them for 2 years.  They're not talking about showing the previous owners tax return.  So if you haven't owned for at least 2 years them you probably won't have the taxes returns to meet the retirements,

2. Not the same for properties 5-10

remembers, this all is for 5-10....1-4 is basically the same
 

[christopher w]

I think what he means is if you have owned one property for two years, and two others for 1 year will you only be allowed to use the income from the property ythat you have owned for two years to help qiualify for properties 5-10; or can you use all the income because you have owned rental properties for over two years. This harks back to my comment about landlord experience.

[Investment Loans]

The guideline for properties for 5-10 is that you must have 2 years tax returns for any property that you want to consider for rental income.

There is no landlord history requirement so having owned some properties for a couple years wouldnt allow you to use income on properties where there isnt a 2 year tax history.

[christopher w]

Here is what Fannie says regarding the subject property on properties 5-10. Keep in mind this is only regarding the subject property.


X, 402.24: Rental Income (11/27/02)

Rental income received for a one-family investment property or a two-family to four-family property is acceptable stable income, even when the borrower occupies one of the units of a multiple-unit property, as long as the likelihood of the continuance of the income can be established. Proposed rent—such as the proposed rent for the borrower’s current residence—is not acceptable unless it is supported by an appraiser’s opinion of market rent for that particular property.

When the security property for the mortgage that is being underwritten will be rented, either the borrower or the appraiser should complete an Operating Income Statement (Form 216)—or a similar form that has the same type of information—to provide the information the lender needs to determine the cash flow and operating income derived from the rental property. Additionally, the lender may rely on either a Single-Family Comparable Rent Schedule (Form 1007) or a Small Residential Income Property Appraisal Report (Form 1025) to obtain the gross income that should be used in determining the income-producing ability of the property. The documentation that is used to support a borrower’s continued receipt of rental income and the calculation of such income depends on whether the rental income is received in connection with the security property for the mortgage being underwritten or in connection with other properties the borrower owns.

• When the rental income relates to the security property and the borrower has no history of receiving rental income from the property, the lender must document the rental income by obtaining an appraiser’s opinion of market rent and, if applicable, copies of the current lease agreement(s). The gross rental income from the property will be equal to the lesser of the market rent established by the appraiser or the current rent based on the existing lease agreement(s). Net rental income will equal 75 percent of the gross rent; the remaining 25 percent of the gross rent is absorbed by vacancy losses and ongoing maintenance expenses. However, when the borrower has a history of receiving rental income for the security property, the lender must document the rental cash flow by obtaining copies of pages from the borrower’s most recent two years of signed federal income tax returns and the related Supplemental Income and Loss (Schedule E to IRS Form 1040). The lender should then analyze the borrower’s rental cash flow and calculate the net rental income (or loss), making sure that depreciation or any interest, taxes, or insurance expenses were added back in the borrower’s cash flow analysis.
 
• When the rental income relates to rental property other than the security property, the lender may document the rental income by obtaining copies of the pages from the borrower’s most recent two years of signed federal income tax returns and the related Supplemental Income and Loss (Schedule E to IRS Form 1040) or the current lease agreement(s) (only if a property is not listed on Schedule E because it was acquired subsequent to filing the tax return). If the lender uses current lease agreements, the net rental income will be 75 percent of the gross rent from the lease agreements, with the remaining 25 percent being absorbed by vacancy losses and ongoing maintenance expenses. When the lender uses the signed federal tax returns (including Schedule E) to calculate the net rental income (or loss), it should make sure that depreciation or any interest, taxes, or insurance expenses were added back in the borrower’s cash flow analysis. Since Schedule E does not account for the full amount of the mortgage payment for the rental property, the lender should make sure that any portion of the payment (interest, taxes, and insurance) that needs to be added back in the cash flow analysis to avoid a double counting of the expenses was, in fact, added back.
 

The amount of monthly net rental income (or loss) that is considered as part of the borrower’s total monthly income (or expenses)—and its treatment in the calculation of the borrower’s total debt-to-income ratio—will vary depending on whether the borrower occupies the rental property as his or her principal residence.

• If the net rental income relates to the borrower’s principal residence, the monthly net rental income (as defined above) should be added to the borrower’s total monthly income. Any net rental loss should be added to the borrower’s total monthly obligations. The full amount of the mortgage payment (principal, interest, taxes, and insurance) must be included in the borrower’s total monthly obligations when calculating the debt-to-income ratio.
 
• If the net rental income relates to a property other than the borrower’s principal residence, the monthly net rental income (as defined above, but excluding the full amount of the related mortgage payment) should be added to the borrower’s total monthly income, while any monthly net rental loss should be added to the borrower’s total monthly obligations. The full amount of the mortgage payment for the rental property (principal, interest, taxes, and insurance) is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation. However, the full amount of the mortgage payment for the borrower’s principal residence must be counted as a monthly obligation.
 

[Investment Loans]

Chris,

This is may not be correct for properties 5-10.  When I spoke to Fannie they explained that since the subject property does not have 2 years tax return income can not be counted.

She said that the new guidelines on income were very vague and that Fannie's credit team was meeting soon.  Being part of that meeting, she was going to bring up some of the concerns that make these interpretations tough on lenders.  Hopefully we'll see some clarifications on this soon.

If your underwriters are looking at that differently then I encourage you to ask them if they've contacted the end investor or fannie to determine how to proceed.  It could be that even underwriters internally at Fannie are confused on this.

[LandmarxProps]

Here is the language from the new announcement which clearly states you can use rental income on the subject property (Sentence 1) This would indicate that if the new property counts then previous properties should count also. But yes I do agree that it does need clarifying. Lets just wait and see.

Rental income on the subject investment property must be fully documented according to the
Selling Guide, Part X, 402.24 Rental Income. Rental income from other properties owned by
the borrower must be supported by two years’ federal income tax returns. DU messages
permitting reduced rental income documentation must be disregarded and full documentation
must be obtained.

Most investors who own multiple properties would not qualify if rental income is not used.

[Investment Loans]

As I read this again I agree that it appears subject rental income can be used as always allowed for properties 1-4. 

Let's hope Fannie clarifies on other rentals owned with less restrictive qualifications than expected.

thanks Chris,  thanks LP