Rental income can be a touchy subject with lenders. Many just don’t want to deal with it while others allow it but only if you meet certain requirements. The VA program is one of the programs that allow it under certain circumstances.
Just like many other aspects of the VA program are flexible, many people can use projected rental income to get a VA loan. Keep reading to find out if you are one of those people.
What’s the Scenario?
First, you have to look at the scenario. Are you looking to purchase a multi-unit property with your VA financing and live in one of the units? Or do you already own rental properties but are using the VA financing to purchase your own primary residence?
Either way, you will need to prove that you have a history of collecting rent. In other words, the VA doesn’t allow you to be a ‘new landlord’ and use the projected rental income for the property. While you won’t have a history of renting out units in a property you haven’t bought yet, you can prove your ability to be a successful landlord with a positive history with other rental properties.
Just how long do you have to prove that you were a landlord? It depends on what you are trying to do as well as the lender’s requirements. In general, you can expect lenders to want a two-year history as a landlord. You can prove this by providing your tax returns from the last two years that shows receipt of rental income during that time.
Determining the Rent
Your scenario will help determine the amount of rent the lender will use for qualifying purposes. If you have existing properties that you rent out, the lender can use 75% of the rent that you claim on your tax returns. The lender will likely take a 2-year average to account for any vacancies or decreasing rents.
If you are just now buying a multi-unit property that you will rent out, the lender can use the fair market rent for the area. Again, they will take 75% of that amount to account for the ups and downs that come along with being a landlord.
Even if you have a history of receiving rent, lenders typically want to see some type of reserves on hand in order to compensate for the riskiness of using rental income for qualifying purposes.
If you are buying a multi-unit property, you’ll need at least six months of principal, interest, taxes, and insurance in a liquid account, such as a checking or savings account. This way the lender knows that you have the ability to cover six months of payments should one of your renters stop paying their rent.
If you already own rental properties and are using the VA loan to buy a primary residence property, you’ll need 3 months of reserves on hand. Again, this includes the principal, interest, taxes, and insurance. This helps offset the risk of a renter not making their payments and reducing your cash flow for the time being.
A Likelihood of Continuing
It’s important to understand that you need to prove that your ability to rent out the property will continue for the near future. Lenders like to know that your income will continue for at least 3 years. While no one can predict the future, lenders can tell from your history as a landlord how likely you are to continue. If it’s been a rocky road for you with many vacancies and financial issues, a lender may not use your rental income for qualifying purposes. If, on the other hand, you have had smooth sailing as a landlord, the income may be used just like the income from your job is used.
You may be able to use rental income to qualify for a VA loan if you have the history to prove that you are successful at it. The rental income can help lower your debt ratio and increase your chances of becoming a homeowner with a VA loan program.