It is possible to use the expected rental income to offset the monthly mortgage payment on a property you are buying. This applies to both investment properties and properties you plan to live in. However, rental income from your primary residence or a second home cannot be used to qualify for a mortgage. But, if you rent out a guest house, for example, the rental income can be taken into account and should be reported on your tax return. Having a tenant for your current home can help reduce your debt-to-income ratio.
By converting it into a rental property, you can use the future rental income to offset the cost of your current mortgage and then qualify for another mortgage based on your adjusted debt-to-income ratio. Unfortunately, major mortgage payments cannot be deducted from your income, regardless of whether the real estate is your primary residence or a rental property. But, you can deduct mortgage interest payments if they come from money borrowed to buy or improve a rental property. It is important to note that mortgage interest payments from your primary residence cannot be deducted. With careful planning, you can use the rental income from your current home to offset your costs and have the financial flexibility needed to qualify for a new home.
If the market rent is 25% higher than your mortgage payment, you can exclude the entire monthly mortgage payment when you qualify. This means that up to 75% of the rent charged can be used to offset the monthly mortgage costs of both your previous and current homes. You won't be able to pay off the mortgage for a rental property, but you can claim the share that represents mortgage interest, property taxes, and mortgage insurance premiums. Whether you're recently married, expanded your family, or simply need more space, you can use the rental income from your current home to buy a home that fits your current needs. Without a tenant for your condo, a 55% debt-to-income ratio is too high for a lender to qualify for both mortgages. To calculate projected rental income, you'll need to talk to your real estate agent to get an idea of rental rates for similar homes in your area.
Your current mortgage increases your total debt, but in order to qualify for the home you want to buy, you'll still need to have a debt-to-income ratio of approximately 43% or less. As a landlord or aspiring real estate investor, lenders may allow you to use rental income when applying for a mortgage. You may need to provide additional documentation that demonstrates actual or expected rental income and may be subject to additional research. Depending on your situation, using future rental income when applying for a mortgage on an investment property can be very beneficial.
