Dear Big Move,
First off, I’m a complete beginner, I know next to nothing, and I’m expecting to be laughed at. Here’s my question: I’m currently living with my girlfriend. I’ve been looking for houses, and I’ve found a very nice quadplex that’s just been renovated.
I run two businesses, but personally have no source of income. Here’s why: In addition to my two existing businesses, I am working on creating a third, but they are under my girlfriend’s name for privacy reasons. Money isn’t an issue.
“‘It’s a popular college town with new renters coming and going every year. I have zero concern about finding tenants.’”
I would like to take advantage of us both using a Federal Housing Administration loan before we get married. I know that FHAs are applicable for up to a four-unit house, and I was wondering if it’s possible for me to get a loan to purchase this unit with no income.
The unit is $ 800,000, and each unit has two bedrooms in an area where the average rent is $ 1,000 per room. The estimated mortgage would be $ 5,000, and if I rent out each room at $ 1,000 a piece that shows a potential of $ 6,000 to $ 7,000 a month rent.
It’s a popular college town with new renters coming and going every year. I have zero concern about finding tenants.
Am I just dreaming or would the potential rental income be sufficient to make the purchase?
American Dreamer
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
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Dear American Dreamer,
Lending standards are pretty strict with conventional mortgages, so you may run into issues since you have nothing on paper to show your income. If your privacy reasons are related to taxes, your chickens may now be coming home to roost. If so, you may wish to consult the Tax Guy.
For an FHA mortgage, the lender would need to verify your employment for the most recent two full years. If you are self-employed, you will need to produce documentation to show how the business is doing financially, and so on. Either way, you will likely need to show sufficient evidence on your income or assets to qualify for a mortgage with your W-2s or 1099s, and other tax returns.
Even though you have a rough estimate of projected income from your rental properties, you are missing some other factors that come with homeownership — from the down payment, closing costs and insurance to maintenance and repairs that will be ongoing. Mortgage insurance may be required on some loans.
You could also face costs associated with tenant disputes. If you rent your unit to a terrible tenant, you may need to evict them down the line. Do you have enough savings to provide for legal fees and costs associated with such a process?
The problems with an ‘estimated’ income
Another potential spanner in the works: your estimated income will not be taken at face value. You will have to get an appraisal to estimate rental income which can then be presented to the lender. The appraiser will give you a fair market rental value on the units. Plus, only 75% of your projected rental income will count, not the full amount, when applying for the mortgage.
Lastly, consider the market today: high interest rates, as well as high home prices. Will you be able to successfully purchase this home, or will you have competition that will push up the price?
There are some types of loans that allow you to purchase homes with no income and no employment verification, but bear in mind that these are not qualified mortgages (QM). Non QM loans aren’t insured or guaranteed by FHA, Fannie Mae or Freddie Mac.
After the subprime crisis, the U.S. enacted consumer-protection laws under the Dodd-Frank Act related to mortgage lending. Non-QM loans may be easier to obtain, but they may come with separate risks.
Ultimately, you’ll likely hit a wall because of your lack of income. You may need to restructure the businesses so they are under your name, which would mean you are self-employed instead of a company director (assuming you have a title that does not suggest you are a co-owner).
It’s good to think through the process of buying a house with multiple units. But with no stated income, you may have to enlist an accountant and a lawyer to reorganize your business interests to make this dream a reality.
Related: Here’s how much money you need to buy a $ 400,000 home with 8% mortgage rates
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