As the prices of homes have elevated in many locations over recent years, often aspiring homeowners will consider buying a property with intent to rent out part of the space, such as a basement or spare bedroom, to tenants or roommates. The benefit of this plan is to use the rental income to offset the mortgage payment, increasing the potential mortgage value a borrower could qualify for.
When the space is a self-contained suite, fully compliant with municipal zoning (i.e. the suite is legal/permitted), the borrower can use the (projected) rental income added to their own to help qualify for the mortgage. For example, a client could buy a legal 4-plex, occupy one unit and use the rent from the other three added to his own to make the mortgage qualifying debt-to-income ratio work.
However, when the space is a room in your house, or income from a non-permitted (illegal) suite (basement, garage, etc.) that income is generally not allowed to be factored into qualifying as the municipality could force you to shut down your suite. Now this doesn’t mean you can’t rent out a space in your property; it just means you can’t use the projected income to help you qualify for the mortgage because the income is unreliable from a mortgage lender’s point of view.
To prove the amount of rental income a legal space could generate, lenders often require an independent assessment from a licensed property appraiser. Your mortgage professional would help you coordinate this. If leases are already in place, then those can be used to prove income instead.
When you, as the owner, occupy the property; the minimum down payment is as low as 5% provided the property is a 4-plex or less. When you do not intend to live in one of the units, then the down payment requirement is much higher, currently 20% down for a non-owner-occupied rental.
Certain lenders are better to work with than others for qualifying mortgages where the potential rental income is required to make the numbers work. Contact me today for more information.
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