Homeowner Insurance Rental Property

Rental income may not help refinancers qualify for mortgage

The common myth among refinancing homeowners is that the mortgage industry will count the rental income they are receiving from their homes. In fact, rental income will not count toward the borrower's qualifying income, even though the homeowner is reporting it on his tax returns, unless the subject property is a legal and conforming multi-unit property.

In some respects the mortgage industry appears reasonable with today's underwriting guidelines, but on the other hand, some guidelines seem absolutely unreasonable. For example, late last year, one lender set a guideline that stated borrowers with rental properties could only count the rental income that is shown on their federal tax returns.

In other words, if a borrower purchased a rental property in June and the tax returns for that year only reflected six months of rental income, we would have to offset the full monthly principal, interest, taxes, insurance plus any other expenses claimed on the tax returns with just 6 months of rental income. Fortunately, this guideline was not adopted across the board by all lenders. It should also be noted that an underwriter may use the old standby formula of counting 75 percent of the rental income assumes 25 percent will cover expenses if a full year of tax returns are not available.

We also used to be able to simply use the interest portion of the mortgage payment as an expense against the rental income since principal is not included as an expense on federal tax returns. However, the mortgage industry now requires us to count the full principal and interest payment as an expense. This additional expense results in either lower income or greater negative cash flow for the property. Either way, it reduces the purchasing power of the borrower.

There is a completely different set of rules for a homeowner who buys another home and plans to rent their current home. Homeowners who want to buy and move into another home before selling their current home face the likelihood of having two mortgage payments to make one on the home they are leaving plus one on the home they are buying.

Where can I find good homeowners insurance for rental property in ...

I have a contract on a home in Mobile, AL that will be rental property. For some reason, I can’t find too many agencies to get homeowners insurance in this area. Any good names, numbers, websites, contacts, ect?

Chosen Answer:

I had trouble finding insurance after Katrina. Only 2 companies were willing to write: State Farm and AIG Direct. Give those two a try and see what you can get. Unfortunately, we’re not in a place that insurance companies really want to sell policies.

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1. We link your name to your website which may improve your site ranking with Google.

2. Because we include your web link, other readers may click through and visit your site.

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