Will depreciation count toward my debt to income ratio?

Question

Hello,

the depreciation expense deduction from my rental property on my tax return is lowering my overall income.

Is that depreciation "added" back to my total income when the bank calculates my debt to income ratio?

Are there any items a bank includes in their debt to income ratio calculations that otherwise show up as deductions in my tax return?

-George

Donald M. · Answer

To purchase a residential property, do all lenders include depreciation of other properties/property in their calculation? It seems that savvy ones would recognize that it is not a real expense and not include it. Is there a difference in the big lenders and the smaller local ones (eg, credit unions)?

For a real estate investor, doesn't this severely limit the ability to buy new properties? Because each rental property that is bought could increase the paper losses due to depreciation early in that property; one could never show the debt to income ratio that the lender wants?

Jeff Trevarthen · Answer

Assuming you're talking about a residential loan here. Depreciation is usually considered by the lender as they want the net income of the property not the gross income. Also, If you have a residential rental (1-4 units) they will also automatically calculate a "vacancy" factor for you regardless if you're property has been vacant or not.

Will depreciation count toward my debt to income ratio?

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