How to Use Rental Income as Revenue to Buy a Home


        Rental income can be a powerful tool to help you qualify for a mortgage, especially if you own rental property or are purchasing a home with rental potential. Did you know some lenders allow up to 90% of rental income to be factored into your mortgage application. However, it’s important to note that you must still meet the lender’s qualification criteria, including income, credit score, and debt-to-income ratio.

Steps to Qualify Using Rental Income

1. If You Already Own Rental Property

For those with existing rental properties, rental income can be used to strengthen your application:

  • Provide the lender with documentation of your rental income. This includes:
    • A signed lease agreement.
    • Proof of rent payments (bank statements or canceled checks).
    • Rental income reported on your tax returns (Schedule E).
  • The lender will calculate 90% of the rental income and use it to:
    • Increase your qualifying income, or
    • Offset your debt-to-income (DTI) ratio.

2. If You’re Buying a Property with Rental Potential

If you’re purchasing a property with a basement suite, duplex, or other rental opportunity, the lender may allow you to use the projected rental income to qualify:

  • A rental income appraisal or market rent analysis will be conducted.
  • If you already have a lease for the rental unit, the lender can use that income.
  • The lender will calculate 90% of the rental income and add it to your qualifying income.

You Must Still Qualify for the Mortgage

Even with rental income, lenders require that you meet their overall qualification criteria:

  1. Credit Score: Ensure you meet the minimum credit score for the loan program.
  2. Debt-to-Income Ratio (DTI): After factoring in rental income, your total monthly debts (including the new mortgage) must not exceed the lender’s DTI limit, typically 43-50%.
  3. Down Payment: Depending on the property type, you’ll need a sufficient down payment.
  4. Employment and Income Stability: Lenders will review your employment history and ensure that your non-rental income is reliable.

Even if rental income strengthens your application, it doesn’t replace these core qualifications—you’ll still need to show that you can handle the loan responsibly.

Example Scenario: Existing Rental Property

Let’s say you own a property generating $3,500/month in rental income:

  • With this lender, 90% of $3,500 = $3,150/month can be used to qualify.
  • If your current annual income is $80,000 ($6,667/month), adding $3,150 increases your total qualifying income to $9,817/month.
  • This increase makes it easier to qualify for a larger mortgage or improve your DTI ratio.

Example Scenario: Buying with Future Rental Potential

If you’re purchasing a home with a legal basement suite:

  • Purchase price: $900,000.
  • Expected rental income: $2,000/month.
  • The lender will use 90% of $2,000 = $1,800/month to strengthen your application.
  • This $1,800/month can offset the new mortgage payment or help you qualify for a higher loan amount.

Note: You must still qualify for the mortgage based on your own income, credit score, and other factors.

Benefits of Using Rental Income

  1. Boost Your Buying Power:
    Adding rental income to your application increases your qualifying income and purchasing power.

  2. Offset Debt-to-Income Ratio:
    Rental income helps lower your DTI, improving your ability to qualify for the loan.

  3. Leverage Multi-Unit Properties:
    Live in one unit and rent out the others to generate income that can cover a significant portion of your mortgage payment.

  4. Expand Investment Opportunities:
    Using rental income allows you to consider multi-family homes or properties with rental suites that might otherwise be out of reach.

Important Reminder: Always Be Prepared

While rental income is a valuable tool, lenders will carefully evaluate your financial situation to ensure you meet all requirements. Having a solid credit history, stable employment, and sufficient savings will greatly improve your chances of approval.

Next Steps

If you’re considering using rental income to purchase a home, here’s how I can help:

  1. Run the numbers with you to see how rental income could strengthen your application.
  2. Connect you with a lender who allows up to 90% of rental income to be used in qualifying.
  3. Help you find properties with rental potential that fit your budget and goals.

Let’s discuss your options and take the next step toward your home purchase!