A letter that the landlord or property owner signs saying that the borrower is exempt from paying rent for a predetermined length of time is known as a rent-free letter. If the borrower is currently residing in a home that they own without a rental or lease agreement in place, this letter might be necessary.
A rent-free letter serves as additional proof of the borrower’s rental income and serves that goal. This is crucial for borrowers who are self-employed or have income from rental properties because lenders frequently need more proof of this kind of income.
Borrowers could also be required to submit documentation for their rental income on their tax returns in addition to a rent-free letter. Depending on the nature of the borrower’s rental income, this can contain Schedule C or Schedule E documents. When a borrower owns and operates a business or profession as a sole proprietor, Schedule C is utilized to report profits or losses from that activity. Income from rental homes that the borrower owns and administers themselves may be included. Schedule E, on the other hand, is used to report profits or losses from partnerships, S corporations, royalties, and rental real estate.
The borrower shall disclose their rental income on Line 3 of Schedule E. This covers all sums collected from renters throughout the course of the year, including rent, security deposits, and any other fees or levies. On Lines 5-19, the borrower must also list any costs associated with the rental property, such as mortgage interest, property taxes, insurance, repairs, and upkeep.
In conclusion, Freddie Mac may want a rent-free letter in some circumstances even if it isn’t always necessary to offer extra proof of rental revenue. Additionally, borrowers must be ready to present Schedule C or Schedule E papers as proof of their rental income. By supplying these records, borrowers can make sure that their rental income is accurately recorded and taken into account when applying for a mortgage.
Rental income and expenses from a rental property are reported on the Schedule E tax form. Landlords who get rental income from their properties are required to file it as part of their individual tax return, Form 1040.