It seems like lately many people are looking to rental income to either help them afford a more expensive home, or to create income through real estate. Whether you own a rental property(ies) or a basement suite in your home, there are a few things you should discuss with your mortgage broker when you're considering a new mortgage or a refinance/renewal of your existing mortgage.
Today's "Word of The Day" is....
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a consideration or amount that diminishes or balances the effect of a contrary one.
"an offset against taxable profits"
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the amount or distance by which something is out of line.
"these wheels have an offset of four inches"
In qualifying you for a mortgage, there are 2 methods we can use to account for your rental income(s).
Add-Back
Add-back is a scenario in which the lender will add back a percentage of the rental income to your own personal income, and then calculate whether or not you qualify if it were part of your regular income stream. This is very common, although it isn't a true reflection of how most people will use the rent they receive. It's more likely that any rent you receive will go directly to paying the mortgage and any expenses first, and any leftover will then go back into your own pocket (preferably the savings pocket!). This leads us to the alternative method...
Offset
Offset can achieve a much more dramatic effect on your qualifications, due to the way the rental income is applied. Using this method, a certain percentage of your rental income (50-80%) goes theoretically to pay the mortgage, property taxes, and operating expenses of the property first. If there is any leftover, that amount goes back into your own income(as in the add-back scenario). If there is a shortfall (i.e. you don't make enough rent to cover all costs), then this becomes a liability that you must add to your personal liabilities (debts).
What this means for you as the borrower is that using rental offset could mean a property "pays for itself" when qualifying for a mortgage. It may even add some additional income to your qualifications. As you would imagine, this makes it much easier to qualify within a lender's guidelines and is one strategy our clients can use to expand their rental property portfolios.
The Pros and Cons
While it can difficult at first to understand why these have such different effects on your mortgage application/qualifications, what you need to know is that your mortgage broker should be aware of the pros and cons of each. Understanding the nuances and advantages of rental offset could mean the difference between a decline and an approval. Make your rental income work harder!
Leveraging the income you earn from rentals is the key to unlocking more borrowing power. If you're ready to talk about how to best leverage your own rental incomes, give me a call any time! 250.682.0908
Tags: income, qualifying, rental