Using Rental Income From Units to Qualify; Vacant Units; Illegal Units

    I blogged recently about “House Hacking” (here and here) or buying multiple-unit properties in order to use the rental income to subsidize one’s mortgage payment.

    We received numerous questions in response that made for some great blog fodder, discussed below.

    How much rental income can we use?

    For all units that will not be occupied by the buyer, we can use 75% of the lower of the estimated market rent or the actual rent (if the unit is rented).

    What if the unit is vacant?

    If a unit is vacant, we can still use 75% of the estimated market rent for qualification purposes.

    Who estimates market rent?

    The appraiser estimates market rent within the appraisal report. It is often very difficult, however, for appraisers to find accurate data (especially in markets with quickly rising rents), so we encourage agents to provide accurate rental data that reflects the current market whenever possible.

    The availability of accurate rental data can often save deals because appraisers need it to support value via their income analyses and lenders need it for income qualification purposes.

    What if there are illegal units?

    This is tricky because Fannie Mae will allow for an illegal or unpermitted unit if the appraiser can prove “marketability” – by saying it is “typical for the area” and by providing similar comps with illegal units to prove as much.

    But, many investors who buy loans from mortgage banks will not allow for illegal units. In addition, FHA does not allow for illegal units, and my recent “house hacking” blogs focused on FHA financing.

    If illegal units are not allowed, the appraiser cannot attribute any value to them and lenders cannot use the rental income from them for qualification purposes.

    In addition, we often have to remove stoves from illegal units because they are not formally permitted and they represent “health and safety issues.”

    And lastly – properties with illegal units often have appraisal issues because the market attributes value to the illegal units while appraisers can’t, so appraisers have difficulty supporting the contract price.

    If you have any other questions about “House Hacking,” please do not hesitate to reach out to our team or check out this very insightful blog post from Roofstock.

    Jay Voorhees
    Founder/Broker | JVM Lending
    (855) 855-4491 | DRE# 1197176, NMLS# 310167

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