It is my experience that lenders usually allow only 75% of rent as income but 100% of mortgage debt service is credited to your liability.
I think a more complete picture of the 25% reserve involves more than just “vacancy”. The lender reserves 25% of your rental income for both rent interruptions and for cash flow reductions. The rent interruption is (of course) an unexepected vacancy.
Cash flow reductions are the cost of minor repairs and maintenance (normal wear and tear), as well as, the unexpected/unscheduled major expense (new water heater, HVAC repair, roof repair, etc.) These items in addition to the normal increases in your annual property taxes and insurance premium all reduce your cash flow.
I believe this is a more complete picture of why the lender credits only 75% of your gross rent as income.
Seller Wants To Buy Another Home - Posted by SharonB
Posted by SharonB on January 24, 2002 at 19:52:42:
If you do a L/O, or Subject to with a seller, will the seller have problems obtaining financing to buy another home?
I would assume if the current mortgage on the l/o or subject mortgage is being paid, and proof is provided, then they wouldn’t have a problem obtaining financing.
What would be substancial proof that their mortgage is being paid. A l/o contract and canceled checks? A third party escrow showing proof the mortgage is being paid?
Most lenders will require a vacancy factor be applied to any rental income for a property. Basically they assume that for the purposes of income and DTI calculations the rental property is going to be vacant 25% of the year. (25% is typical) If the seller’s income is enough to cover the difference in the payment and their proposed loan subject to the underwriting guidelines of the new loan the L/O shouldn’t be a problem.
The trouble I see could be that since the seller is motivated, hence a good candidate for a L/O sale, then they might not qualify for the new loan as their budget could be stretched too far already. (Not your problem.) Well, that’s my two cents for the night, hope this helps.
Re: Seller Wants To Buy Another Home - Posted by Beverly in MN
Posted by Beverly in MN on January 25, 2002 at 18:33:01:
I’m a Loan Officer and the lenders I use require 12 months seasoning on the note, and at least 24 months left on it. Otherwise the full amount is counted in their debt to income ratio. Maybe the seller could get around that in a NINA or Stated loan when financing their next home. But most typical homeowners are planning to sell and move on, and get the best possible rate for their next home. This has been my biggest question in real estate investing. I’ve been looking for a good answer to this one myself… I must be missing something.
