Freddie Mac has made some changes to the way in which lenders must handle rental income. The changes are primarily aimed at determining the stability of that income, especially when it is short term and does not involve a lease. The changes apply to loans with settlement dates on or after February 9, 2018, but sellers can, if they wish, implement them in their entirety immediately.
The company says the changes to rental income requirements reflect changes in the rental market such as short-term rental income and are intended to support the determination of stability, calculation of rental income, and a reasonable expectation that rental income will continue.
A loan used to purchase or refinance the subject property, or a non-subject property, which was not owned in the prior calendar year requires considering net rental income only up to a limit of 30 percent of the total of that net rental income plus all other stable monthly income used to qualify the borrower. The exception would be a borrower who has a documented history of investment property management experience of at least one year. The change, Freddie says, is to "provide support to sustainable and successful homeownership by requiring a reasonable limitation upon the reliance on a newer type of income stream."
To use rental income in refinancing a 1- to 4-unit investment property, a 2-to 4-unit primary residence, or a non-subject investment property, the following conditions must be met.
Short term rental income (i.e. from a source where a lease is not utilized) must have a two-year history documented on IRS Schedule E and the property must have been used for the purposes of producing rental income for that period of time. Freddie Mac says that short-term rental income tends to fluctuate so historical analysis of the degree of volatility is necessary to determine stability.
Long term rental income can be verified through either a current signed and executed lease with an original term of one year or through income reported on Schedule E. Sellers may also determine that rental income is stable without a lease when it is evident the income is not short-term, based on the documentation provided.
The Freddie Mac Bulletin (#2017-12) also includes technical changes to rental income calculations, clarifications of some self-employed income revisions made last year, and updates to MultiLender Swap posting information.