Government-sponsored organization Freddie Mac buys home loans from lenders. Because Freddie Mac doesn't lend to the public, your lender's underwriter will be responsible for submitting your loan application to Freddie Mac. If you are buying an investment property, qualifying will be more challenging because of the higher debt-to-income ratios that are required over the purchase of a typical owner-occupied property. You can use rental income to qualify for the mortgage on the investment property, provided certain requirements are met.
Rental Income From Other Properties
If you're using rental income from a property you currently own, Freddie Mac has specific documentation requirements for evidence of income. You can provide Schedule E of the previous year's tax return showing the net rental income after all rental expenses were deducted. If you recently acquired a property and didn't report the income on the previous year's taxes yet, Freddie Mac will accept a copy of a signed lease agreement. Freddie Mac will only accept the signed lease as verification if you have at least two years experience managing other rental properties. If the rent is not enough to cover the mortgage, it will be considered a liability.
Income From the New Property
If you want to use the projected rental income from the property you are trying to purchase, you'll need to complete the Operating Income Statement, also referred to by Freddie Mac as Form 998. The form requests information from you, the property appraiser and the lender's underwriter. You'll need to indicate the expenses and the monthly rent. If you do not have a tenant yet, you must note the projected rent confirmed by the appraiser. A replacement reserve schedule must also be completed to factor in the cost of replacing existing equipment, such as the air conditioner, over the life of the loan. The expenses are deducted from the rent to get your net monthly income that can be used toward qualifying.
Required Investment Reserve
If you are using the income from a property you currently rent to qualify for the loan, you'll need a reserve savings that shows you have enough money in the bank to cover at least two months of mortgage payments, including taxes and insurance, for each financed property. If you intend to rent out the investment home you are purchasing with the Freddie Mac loan, you'll need to show you have a reserve saved up equal to at least six months of mortgage payment for the property.
No rent-loss insurance is required if you are using income from other rental properties to qualify for the mortgage. However, Freddie Mac requires rent-loss insurance coverage on the investment property you are purchasing. The amount of coverage must be for at least six months of gross monthly rental payments. You can purchase rent-loss coverage through your homeowners insurance carrier for an additional premium, which can vary in cost depending on the variables.
- What Are the Benefits of FHA Loans for First Home Owners?
- How to Refinance a House That Has Been Paid Off
- Do Mortgage Lenders Use My Net or Gross Income?
- "When You Refinance a Mortgage and Buy Another Property, Does the Bank Own Both Properties?"
- How to Refinance the Mortgage on Rental Property
- Owner Occupant vs. Rental Property