How Does Rental Income Affect Mortgage Preapproval?

If you're planning to buy a second home and rent it out part-time or to buy a home as a year-round rental, the future income you expect won't matter in the preapproval process. When a bank preapproves a loan, it wants to see proof of your income, not speculation about what you're going to make in the future. Even if a broker does issue you a preapproval letter based on your predictions, your lender will probably exclude the income later in the process.

Your income matters because lenders have rules about how much debt you can carry safely. If you spend more than 28 percent of your income on your housing payment -- mortgage, insurance and taxes -- you rank as a risky borrower. The same caution applies if your housing payment plus your other debt payments adds up to 36 percent of your income. The more income you show you have, the bigger a mortgage you can afford.

If you already own a rental, you need to show you've had a steady income from the property for at least a year. Otherwise the lender may decide it's too uncertain to count in preapproval, let alone later. If the lender's doing a thorough preapproval, she'll look at your rental expenses as well as your income. Your preapproval figure will be based on net income, after expenses. Mortgages backed by the Federal Housing Administration require at least three years of steady income.

You may be able to get away with fudging numbers or making optimistic predictions during preapproval. That won't help you if you go further in the process and the underwriters start crunching your numbers. You have to present your tax returns, for instance, so the underwriter will know every rental expense you've written off on your taxes. Even if you don't think some of the expenses should count -- because they were one-time emergency repairs, say -- the bank's unlikely to agree.