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Question regarding including rental income for mortgage

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Valued Contributor

Question regarding including rental income for mortgage

Hi all and Happy New Year!

I have a question as I'm going round and round with my LO.

Earlier this year, I converted my home to a rental property, have a renter and signed lease and can verify all rent payments. After I converted the home, I signed a contract for a new home.

My LO is stating that if I don't have 30% equity in the home, I can't show it as rental income until I report it on my taxes. She says that she can't use the lease agreement. She states that it's not the lender overlay, it is Fannie Mae.

Now, I have read over and over, and from my understanding, the 30% rule is only if you are converting your primary residence to an investment As the result Of the purchase transaction.

Since I've already moved out of the house and the renter has moved in, how should the rental income be calculated? Can we use the lease? Because of when we close, I'm worrying that the IRS will not have our tax returns processed in time.
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8 REPLIES 8
Valued Contributor

Re: Question regarding including rental income for mortgage

bump

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Senior Contributor

Re: Question regarding including rental income for mortgage

I'm a sales counselor with a national builder and our lender has the same requirements. In fact, only the rental income reported on tax returns will be used.

Message 3 of 9
Valued Contributor

Re: Question regarding including rental income for mortgage

Guess who will be filing taxes ASAP. 😃😃
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Message 4 of 9
Community Leader
Super Contributor

Re: Question regarding including rental income for mortgage


@frugalQ wrote:

Now, I have read over and over, and from my understanding, the 30% rule is only if you are converting your primary residence to an investment As the result Of the purchase transaction.

Since I've already moved out of the house and the renter has moved in, how should the rental income be calculated? Can we use the lease? Because of when we close, I'm worrying that the IRS will not have our tax returns processed in time.

The 30% equity rule applies when you have converted a primary residence to a rental property and the rental income hasn't yet been reported on your tax returns, the "result of the purchase transaction" part isn't part of the guidelines.  Once it's reported on your tax returns then no equity is needed.

 

https://www.fanniemae.com/content/guide/selling/b3/6/06.html#Conversion.20of.20Current.20Principal.2... has the full details.  Once it's reported on your tax return then https://www.fanniemae.com/content/guide/selling/b3/3.1/08.html#Calculating.20Monthly.20Qualifying.20... applies.

 

The good thing is we're at the end of the year, so you can file your 2014 tax returns claiming the rental income very soon and it'd eliminate the issue you are facing.

 

Good luck!

Helping people with mortgages (FHA, VA, USDA, Fannie, Freddie, Non-Prime, Construction, Renovation/Rehab, Commercial) since 2002
Located in Orange County, CA and lending in all 50 states
Message 5 of 9
Valued Contributor

Re: Question regarding including rental income for mortgage

Yes, that is what I've gotten from other LOs as well.

We are filing our taxes as soon as the irs starts accepting them.

Question: on the rental income calc sheet, is the mortgage payment on the rental annualized? If so, is the rental income annualized also? (Ok, that's two questions)
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Valued Contributor

Re: Question regarding including rental income for mortgage

The IRS starts accepting e-file returns on 1/20/15. I hope to have ours completed 1/21/15. 😄😄
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Community Leader
Super Contributor

Re: Question regarding including rental income for mortgage


@frugalQ wrote:

Question: on the rental income calc sheet, is the mortgage payment on the rental annualized? If so, is the rental income annualized also? (Ok, that's two questions)

It is, but you must enter in the "fair rental days" number correctly, as that number is used to determine how the rental income is calculated.  For example I had a client who rented out his home just for a few months in 2012, but they incorrectly put 365 days for "fair rental days".  They had to write a letter of explanation that they messed up when they put in the # of days, as well as provide other documentation that supported the correct amount of days the home was rented out for.

Helping people with mortgages (FHA, VA, USDA, Fannie, Freddie, Non-Prime, Construction, Renovation/Rehab, Commercial) since 2002
Located in Orange County, CA and lending in all 50 states
Message 8 of 9
Valued Contributor

Re: Question regarding including rental income for mortgage

great thx! for the clarification!!

 

Happy New Year

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