If someone wants to purchase a second home as a source of rental income (and potential investment), would (or could) a lender apply the estimated future income from rent on to the present debt-to-income ratio of the loan applicant?
They will include the rental income into the calculation. They don't give you a 100% credit for the income because they have to factor that you might have a gap between tenants. Years ago they only credited me with 66% of the expected monthly income.
- $600 Principal, Interest, Taxes, Insurance, Condo Fee
- $400 Rent credit (2/3 of the $600 in rent I charged the tenant)
- Resulting in an expected loss of $200 a month.
This expense was then supposed to come from the 10% of my income that was allocated for monthly non-principal mortgage loans, e.g student loan, auto loan, credit card debt...
Having both purchased income properties and converted prior residences into rental properties I have found that it is difficult to get the banks to consider the potential rental income in qualifying you for a loan. It helps if you have prior rental experience but in many cases you will have to qualify outright (i.e. without consideration of the potential income). The early 2000s were great for responsible borrows/investors but today's regulations make it much more difficult to finance income property.
Generally speaking, no they won't. In this case, though I haven't done it myself, I was recommended to put the mortgage on the real estate after it's been leased out and has a contract on it. Then, yes, they will use it for that. But, ex-ante don't expect any bank to count on income from it because, at that point, there's zero guarantee you'll get it leased, and even if you do, at what rate.