Getting a Mortgage Based on Rental Income
Need a mortgage based on your rental income? The brokers we work with can help you get the best deal on the market
Firstly, how long have you been receiving rental income for?
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Author: Pete Mugleston - Mortgage Expert, MD
Updated: December 13, 2021
For many owners of investment property that generates rent, the next step might be to grow your existing portfolio or to purchase a home for yourself.
Something that will probably spring to mind is using that rental income to qualify for a mortgage for that purchase.
The good news is that there are plenty of lenders who will consider rental income as part of a mortgage application.
However, as you may already know, different lenders have different criteria which means only some will be suitable for your needs.
This is where an experienced mortgage broker with that expert knowledge can really help, but before you approach one, have a read through our guide to find out everything you need to know about this topic.
The following topics are covered below...
Can you use rental income to qualify for a mortgage?
Yes. Although not all mortgage lenders will approve a mortgage solely on the basis of rental income, many will certainly take it into account, provided you fit their eligibility criteria.
As we said earlier, different mortgage lenders have different criteria you need to meet.
- Many lenders will accept all or a percentage of your rental income on a mortgage-free property
- Some lenders are happy with mortgaged rental properties but might only accept either the net profit – income after the mortgage has been paid – or a percentage of that annual rental income
- Some lenders prefer rental income to be listed as a secondary income or second job to accept the full rental income.
- Other lenders will only accept a proportion of rental income for affordability calculations in addition to your income from a full-time job.
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How to get a mortgage using rental income
Now that you understand the different details that are useful to securing a mortgage using rental income, here’s a quick step-by-step checklist as to exactly how you can get that mortgage.
Step 1: Prepare your documents
Get all your paperwork relating to your rental property together, including the SA302 proving your annual income for the past two years at least. You will also need mortgage details where that’s relevant.
If you also work, collate your P60 and other important information relating to your job and earnings.
Step 2: Get your deposit together and proof of it
Work out how much money you have for a deposit and if it’s a cash deposit or if it will need to come from another property you own.
You’ll also need to provide your lender with evidence of your deposit funds, so be sure to have that handy before you apply.
Think about what size mortgage you would need, to buy the property you want, factoring in the amount of deposit you have available – be realistic.
Step 3: Speak to a mortgage broker
Find a mortgage advisor who specialises in investment/rental income based mortgages to help give you the best chance of agreeing that all-important new mortgage.
Your broker will guide you through the rest of the process from here, offering bespoke advice every step of the way.
We can match you with the right advisor through our free broker-matching service. Read on to find out how it works.
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What types of mortgages are available?
Residential mortgages are the most common type of mortgage that can be secured with rental income.
Investment mortgages are also an option with many lenders, although the criteria may differ from those for a mortgage for your main home.
Meanwhile, although fewer lenders will allow rental income on a commercial mortgage application, it is possible.
This situation in particular is where seeking professional advice would prove invaluable.
A mortgage advisor who specialises in mortgages based on rental income will reduce your lender list and help you collect all the relevant information.
How much rental income will be taken into account?
When you complete your mortgage application using rental income, the proportion of that income a lender will consider depends on their specific rules.
If you wish to use 100% of your rental income then this is most likely to be possible if the investment property is mortgage-free.
Where rental income is an additional income some lenders will consider 100% of that income of a mortgage-free property on your application.
For applications where the investment property has a mortgage and the rent paid is the applicant’s sole income, lenders will be more inclined to consider only a percentage of that rental income, but that could be up to 75%.
One of the reasons people use a broker is because they know exactly which lenders to approach to make your money go further.
The right mortgage advisor will have the knowledge, expertise and lender contacts to increase your chances of landing a deal based on 100% of your rental profits.
Buy-to-let mortgages based on rental income
Most buy-to-let mortgages are offered based on the projected rental income they can generate.
It’s not uncommon to get a buy-to-let mortgage that’s based only on rental income, although some lenders might have minimum personal income requirements, especially if you’re a new landlord.
For rental properties that are mortgaged, in many cases, the lender will look to use the net profit of the rental income.
However, in some cases, a lender may calculate things differently, by using the mortgage as a debt and then looking at the rental income separately as part of their affordability assessment.
Often they will then only accept a percentage of the rental income – often 50% – but there may be a few lenders who would consider more than that or even 100%.
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What evidence do you need to supply?
Almost all lenders will need your tax records, an SA302 form, showing your rental income for at least two years, with some lenders preferring three years of details.
This provides information that has been declared to HMRC and is considered the most reliable from a lenders’ perspective. Many also like to see the tenancy agreement too.
Some lenders will consider bank statements showing rental payments, in addition to a signed tenancy agreement.
However, if this is your preferred way of proving your rental income, your options of lenders will be smaller.
It is also possible to use rental income on your mortgage application where the rent has only been paid for a few months, with the use of estimates and averages.
However, fewer lenders are willing to consider these circumstances.
If you feel that you don’t have enough proof of your rental income to get a mortgage, speak to a broker.
They will know exactly which lenders are best positioned to be flexible when it comes to income proof and can help you ready all of your documents.
How much deposit you’ll need
As with any mortgage, the size of your deposit will depend on a number of different things, however, it’s likely that at least a 20% down payment will be required.
That’s not to say some lenders won’t accept a smaller deposit – a few will – but their other requirements might not be suitable due your circumstances surrounding the rental income and whether or not your investment property is mortgaged or not.
It’s also important to remember that in most cases, the higher your deposit, the better mortgage interest rate and terms you’ll be able to secure.
Get matched with a mortgage broker today
Buying a property is rarely straightforward but when you add in the use of rental income as part of your chosen lenders’ affordability assessment, it can become more complex.
You might be able to secure a good mortgage that suits your needs without expert advice.
However, by speaking with a mortgage advisor who specialises in this area, you will have more options and also some support to go through the process.
We offer a free broker-matching service that will take your needs and circumstances into account to pair you with the mortgage advisor who is best placed to help you get a good deal based on your rental income.
Call 0808 189 0463 or make an enquiry and we’ll set up a free, no-obligation chat between you and them today.
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About the author
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!