Many of the requirements that pertain to rental income are the same for loans underwritten through DU as they are for manually underwritten loans. See B3-3.1-08, Rental Income, and B3-6-06, Qualifying Impact of Other Real Estate Owned, for additional income.
“Net rental income” for DU loan casefiles does not include rental income from the subject property. It applies only to rental properties already owned by the borrower. For rental income on the subject property, see Subject Net Cash Flow below.
To submit net rental income to DU, the lender can either
Calculate the total net rental income for all rental properties (except the subject property) and enter the amount (either positive or negative) in the Net Rental field in Section V. If Real Estate Owned (REO) data is entered, DU will ignore a zero value in this Net Rental field. Therefore, the lender must enter either a positive or negative amount. In other words, if the net rental income is a “breakeven” amount, the user must enter either $0.01 or $-0.01. Otherwise, DU will use the value from Section VI R.
Complete the REO data entered in the Uniform Residential Loan Application (Form 1003) (or in a loan origination system) for each rental property (except the subject property). DU will preliminarily calculate the net rental income using the following formula:
(gross rental income × 75%) — property PITIA expense = net rental income
The lender should override DU’s preliminary calculation, if it is different from the lender’s calculation, by entering the net rental income amount directly in the Net Rental field in the Full 1003, Section VI R.
If both methods are used, DU will use the net rental income from Section V (if it is a value other than zero) and issue a message when there is a conflict of data.
If the combined total net rental income for all rental properties is positive, DU adds the net rental income to the qualifying income. If the total is negative, DU treats the loss as a liability and includes it in the debt-to-income ratio.
If the borrower is purchasing a principal residence and is retaining his or her current residence as a rental property, show the current principal residence as Rental in the Property Disposition field and complete the Net Rental field in the Full 1003, Section VI R. The conversion of a principal residence to an investment property must follow the guidelines described in B3-6-06, Qualifying Impact of Other Real Estate Owned.
If the borrower’s principal residence is a two- to four-unit property, rental income from the principal residence can be used to qualify the borrower. With the exception of subtracting the borrower’s principal mortgage payment from the gross rental income, all other calculations and documentation requirements in this section apply.
To use net rental income from a borrower’s owner-occupied two- to four-unit property when the borrower is purchasing or refinancing a second home or investment property, enter the net rental income from the borrower’s principal residence as Net Rental in Section V.
The requirements for documenting net rental income are the same for loans underwritten through DU as they are for manually underwritten loans. If the debt-to-income ratio already includes the entire rental property payment (that is, income from the property is not considered), rental income documentation is not required.
The calculation of net rental income is the same for loans underwritten through DU as it is for manually underwritten loans.
Subject net cash flow applies to one- to four-unit investment properties and two- to four-unit principal residences secured by the subject property. DU does not calculate the subject net cash flow. The lender must calculate and enter the income in Subject Net Cash in Section V of the online loan application.
Note: Although negative subject net cash flow values appear to reduce the gross monthly income in Section V, DU actually treats the negative value as a liability and includes it in the debt-to-income ratio.
The documentation of subject net cash flow is the same for loans underwritten through DU as it is for manually underwritten loans.
If the borrower is being qualified with the entire payment, without benefit of rental income, documentation of gross monthly rent for the subject property is only required for lender reporting purposes. See A3-4-02, Data Quality and Integrity, (Reporting of Gross Monthly Rent), for additional information.
The calculation of subject net cash flow for the security property is the same for loans underwritten through DU as it is for manually underwritten loans.
Two- to four-unit principal residence. Calculate the subject net cash flow, and enter this amount in Section V. It will be included in the total qualifying income. Do not subtract the PITIA from the rental income, because the PITIA is included in the total proposed mortgage payment and is considered in the qualifying ratio. Do not enter a negative subject net cash flow value, because the entire PITIA is already included in the qualifying ratio.
Note: Refer to B5-6-03, HomeReady Mortgage Underwriting Methods and Requirements, for information about rental income from accessory units on one-unit properties and income from two- to four-unit properties secured by HomeReady mortgage loans.
Investment properties. Calculate the subject net cash flow. If the subject net cash flow is positive, enter the amount in Section V. It will be included in the total qualifying income. If the cash flow is negative, enter the amount in Section V as a negative value. DU will include it in the debt-to-income ratio calculation as a liability. If income from the subject property is not included in the qualifying ratios, the lender should enter the entire proposed PITIA as a negative amount in the Subject Net Cash field in Section V.
The table below provides references to the Announcements that have been issued that are related to this topic.