One of the biggest obstacles homebuyers will face is being able to show enough income to offset their debts — in addition to a proposed housing payment. If you don’t show enough income to offset your debts according to the bank’s requirements, you may have trouble getting the loan. With that in mind, there is a little-known lending guideline that allows you to show more income, which can help you seal the deal.
In order to take advantage of this guideline, however, you have to turn either your new home or your current home into an income property. Essentially, by doing this, you can use the projected fair market rents for your property in order to show additional income, but you need to meet one of the following financial requirements in order to qualify.
Two Equity Requirements
When we’re talking about equity, we’re talking about cash in the form of a down payment to buy a home, or equity in an existing residence defined as the difference between any loan amounts owed on the property against the value.
20% Down on the Home You’re Buying — If you are purchasing a home, you can use the projected fair market rents to offset the mortgage payment, but you’ll need to have a 20% down payment in order to use this strategy.
Let’s say your mortgage payment on your new property is going to be $2,400 per month. Fair market projected rents on your current residence are $2,200 per month. Lenders will use a 25% vacancy computation to hedge against default. Using the 75% vacancy factor, you’ll get the additional benefit of $1,650 per month more income, so in other words, your take-home income only has to offset a liability of $750 per month versus $2,400 per month. A $750 per month differential is equivalent to as much as $175,000 in purchasing power.