How to Calculate DTI with Schedule E

Question

Hi All,

I purchased an investment property in the middle of last year and to this point have been using 0.75*lease value in my DTI calculation. I have just received a draft of my tax return with the schedule E. I'm wondering how rental income is now calculated. I have heard the value from the schedule E is used (rather than 75% of lease). Can someone explain how the calculation works?

Thank you.

Jay Hurst · Answer

@David Cherkowsky    This form is used:  https://content.enactmi.com/documents/calculators/Form1038.C...    This is what I recreated for you the other day.

Doug Smith · Answer

Debt to Income Ratio will be used for more conventional types of financing (Fannie/Freddie). I own a mortgage company, so I have my loan officers use this Fannie Mae income calculation tool for all business for self borrowers: https://singlefamily.fanniemae.com/applications-technology/income-calculator . This is the actual calculator that traditional underwriters will use. Now, if you're buying in the name of the LLC and you're doing a DSCR deal, that will be irrelevant. Back to the DTI, if you want a quick down and dirty way to do it, start with the bottom line 24 on the 2024 return, then add back in Depreciation (line 18), and possibly interest expense (lines 12 and 13) IF it's also counted against your debt in the liabilities section of the application. The link I put in above, however, is how underwriters are going to do it. I hope that helps you.

Derek Brickley · Answer

Yep sounds like you got it.  Essentially looking at the bottom line and then you can add back a few of those things like depreciation.  All good tips here so far.

Raymond J. Rodrigues · Answer

@David Cherkowsky, the lender will take the full rental income reported on the tax return, for that property, subtract it from the total expenses, add back depreciation, property taxes, mortgage interest, home insurance, HOA(if applicable), sometimes repair expenses(must be documented), divide it by the total amount of months the property was in service for that year (THIS NUMBER IS ON YOUR TAX RETURNS, SO MAKE SURE YOUR ACCOUNTANT DOES NOT PUT 12 MONTHS), and subtracts it against your total monthly mortgage payment. Make sure your accountant puts the right amount of months on your tax returns that the property is in service for, or it will definitely skew your numbers. I am a licensed lender.

David Cherkowsky · Answer

Thank you Jay. This is exactly what I was looking for. Appreciate it!

How to Calculate DTI with Schedule E

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