Rental income not considered - any experiences?

pjs493

I completed quite a detailed online form today with a well-known reputable mortgage broker. When I completed the income section, it provided a box which informed me that many lenders will disregard rental income or require two or three years of tax returns to demonstrate the steady income. I don’t have this as I recently inherited the property and plan to sell it and use the proceeds to pay off the mortgage on the new place after the initial term ends.

Has anyone else had similar experiences of rental income being disregarded? It makes up about 30% of my income so obviously it’s impacting what I’m potentially able to borrow. 

Background: I inherited a rental property off my late husband and it continues to be rented out. I plan on selling it, but the current tenant wants to buy it off me and won’t be in a position to until some time next year. Without the money from the sale of the property I’ll need a mortgage to buy a house when I have to move out of the accommodation that came with my husband’s job. I’ll potentially consider marketing the property now, although I feel bad knowing that a reliable tenant who is close to being able to afford a deposit to buy the property could be cut out of the equation just because I need to liquidise the asset. 

I haven’t updated the Land Registry so I can remain classed as a first time buyer. The rental income was declared on my husband’s tax return until he died. When Probate was granted earlier this year, I started to declare the income as mine and paid off the mortgage that was left on the property. I’ll write to HMRC to declare the interim income as part of the administration of my husband’s estate. Ironically, the money I used to pay off the mortgage is about the same amount that I’m now short of in order to get a mortgage on the property I like and keep the rental property short term.  

penners324

It'll be considered as business income thus your likely to be seen as self employed to a degree.

Self employed need 3 years of accounts for mortgage applications 

pjs493

penners324 said:

It'll be considered as business income thus your likely to be seen as self employed to a degree.

Self employed need 3 years of accounts for mortgage applications 

It's been rented out continuously, with only two short breaks, for the last 11 years. The only difference is that the income from the rent was declared on my husband's tax return until Probate was granted.

I'd also argue that rental income is different to self-employed income. Rental income is pretty much guaranteed, especially with a reliable tenant such as the one I have. Whereas setting up a new business means that lenders want to see a history of the business making a profit to consider the income. 

I have a small business, but haven't included this income because it's only been running for just over a year, despite it already making decent profits.

theoretica

It might be worth discussing this in person with the broker - as you can prove there has been a steady rental income from that property, just with the detail of who it went to.

MWT

pjs493 said:

I haven’t updated the Land Registry so I can remain classed as a first time buyer.

Take care with this as you cease to be a first-time buyer when the assets from your husbands estate were/are distributed after the grant of probate.

Difficult to be trying to use the rental income as part of the mortgage application and claiming to be a first-time buyer at the same time...

ACG

It MIGHT be possible to find a lender to take a view under the circumstances.
However, the problem is that you plan on selling the property. So you want to use an income that will be stopping soon. 

You could potentially do a bridging loan, but it will be a bit pricey, they lend on the asset. 

MWT

ACG said:

However, the problem is that you plan on selling the property. So you want to use an income that will be stopping soon. 

Although the proceeds of the sale would be used to repay the mortgage, not sure that makes it any more appealing to a lender though...

ACG

MWT said:

ACG said:

However, the problem is that you plan on selling the property. So you want to use an income that will be stopping soon. 

Although the proceeds of the sale would be used to repay the mortgage, not sure that makes it any more appealing to a lender though...

I fully understand the argument, its like a catch 22. The problem is you are basically saying you have no evidence of this rental income yourself, but if you do accept it it wont be in place for much longer oh and btw, I will be redeeming the mortgage pretty quickly too. 

It has bridging loan written all over this. It will cost more, but this is exactly its intended use. 

pjs493

ACG said:

MWT said:

ACG said:

However, the problem is that you plan on selling the property. So you want to use an income that will be stopping soon. 

Although the proceeds of the sale would be used to repay the mortgage, not sure that makes it any more appealing to a lender though...

I fully understand the argument, its like a catch 22. The problem is you are basically saying you have no evidence of this rental income yourself, but if you do accept it it wont be in place for much longer oh and btw, I will be redeeming the mortgage pretty quickly too. 

It has bridging loan written all over this. It will cost more, but this is exactly its intended use. 

I can demonstrate the income through bank statements because the rent was paid into our joint account (which turned into a sole account in my name when our bank was informed of my husband’s death). My husband declared it on his tax return as his income because the flat was only in his name. He bought it in his early 20s as a single man before we got married and had children.

I’ve done some research into a bridging loan today, but I’m concerned about the interest rates etc. Someone on another thread has suggested I considered a buy to let mortgage on the rental property to release equity and use that to buy the new house as a cash buyer. That way I can retain the rental property and its income (which will obviously have to go towards a mortgage). I’ll obviously need to speak to a broker to discuss my options. 

Alternatively, I might just have to be a bit selfish and tell the tenant I need to market the rental property now. Ideally, I’d like to wait for them. But if it means missing out on the perfect forever home for me and my children, I might just have to put myself first.  

In some other research today, I discovered the house I want had its asking price reduced six months ago which suggests it’s been on the market for even longer. I’d previously thought it was fairly new to the market and there might be lots of interest so I’d need to move fast, but it might be that there hasn’t been much interest so I might be in a stronger position, especially when it comes to negotiating the price. 

pjs493

MWT said:

pjs493 said:

I haven’t updated the Land Registry so I can remain classed as a first time buyer.

Take care with this as you cease to be a first-time buyer when the assets from your husbands estate were/are distributed after the grant of probate.

Difficult to be trying to use the rental income as part of the mortgage application and claiming to be a first-time buyer at the same time...

Ideally I want to sell the rental and be mortgage free with the new purchase. If I sell the rental property quickly I won’t need to change the Land Registry and the proceeds from the sale can come to me instead. 

But I realise it’s all a bit complicated trying to use the rental income when also trying to sell the rental property. If I could find a lender willing to consider the rental income, I won’t need to sell immediately so could then give my tenants lots of time and change the rental property into my name. 

I realise there would be SDLT to add into the equation then and possible CGT, although the value of the rental property has been pretty stagnant for years. 

pjs493

theoretica said:

It might be worth discussing this in person with the broker - as you can prove there has been a steady rental income from that property, just with the detail of who it went to.

The rent was paid into our joint account so I can demonstrate a history of regular incoming payments, but everything to do with the rental property went on my husband’s tax return because he bought it as a single man before we married. So I can provide bank statements, just not tax returns in my name.