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June 22 2022

Rental Income-How a Duplex Can Impact Your Purchasing Power

If you’re looking to purchase a home, consider purchasing a Duplex or Multifamily home. Including the rental income that comes along with the purchase of a home can increase the amount of money you may be permitted to borrow. I spoke with a realtor friend about this recently when we were trying to help a mutual client buy a home in Colorado Springs. There are a couple keys to know before going this route.

Down Payment

Purchasing property with any kind of investment purpose usually entails having skin in the game. While a primary home purchase allows for many first-time home owner loan programs or down payment assistance (DPA) programs may net an initial 0% down purchase of a home, if a home has investment qualities to it, the same options may not be available. You may be required to borrow at a certain LTV (Loan to Value) in order to include rental income on your home purchase.

Reserves

Reserves on a home loan equate to the amount of monthly income that the home generates multiplied by a certain number of months. Let’s say, for example, that a borrower buys a duplex for $400,000 and is required to have a mortgage payment of $3,000/mo but only makes $4,000/mo. On top of that, let’s say that a lender requires a maximum 50% DTI on that loan amount. The DTI is over budget by $1,000. Let’s say that the borrower can rent out half of the duplex at $1,500/mo. The borrower would be allowed to use 75% of the rental income towards his qualifying Debt-to-Income Ratio (DTI) at $1,125/mo. This now gives the borrower $5,125 of monthly income to count toward their qualifying purchase.

Let’s also say that the loan requires 6 months of reserves. The borrower would have to have $6,750 “reserved”, or set aside, in order to cover the portion of the mortgage in case the rental half of the duplex goes vacant for up to six months. This reserve amount must be available after all closing costs are completed at the close of the loan.

Importance of Assets and Available Cash 

Documented cash and available assets are very helpful when it comes to home ownership and investing in real estate. I’ve joined up with an awesome team at Freedom Home Loans and I would love to put you in touch with them to see what you may qualify for. Take a look around the website or give me a call to see what Juicy Solution might fit your scenario.

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