sorry for the long post but i was wondering if anyone knows how Fannie treats rental income for DTI. i found the following conflict:
with regard to how Fannie addresses rental income as shown on a schedule E when calculating DTI, i found information in 3 places:
in the guide B3-3.1-08: Rental Income, Worksheet for Investment Property(s) Form 1038 and Worksheet for Principal Residence, 2- to 4-unit Property Form 1037
for investment properties: they seem to say take the net profit from the sched E, remove the ITIA expense, remove the depreciation expense (because that is not a cash expense) remove any one time expenses that would not occur every year, such as repairs due to a hurricane(because such an expense distorts the true average yearly income)
Then bring back the ITIA expense (yes we just removed that but whatever!!!)- and then include any mortgage principal (P) expense (that is not deductible and thus does not appear on a sched E).
And there is your rental income. As this is your true actual cash flow this is logical (although i am not sure i would call their methodology to calculate it logical)
if it is negative, they consider it a debt obligation and thus it has to get added to the debt part of your DTI. if it is positive then it is added to the income part of your DTI.
for a principal residence property: the same calculation is carried out except the PITIA expense is left out and the resulting number is used as your rental income. this is counter intuitive as it is not your actual cash flow at all, your actual cash flow is a lot less than that number, it could very well be negative
but what is also counter intuitive is that the PITIA (ie the housing expense of the entire building) is added to the debt part of your DTI.
(so maybe omitting PITIA from your cash flow calculation is a way to compensate for having the housing expense of more than your own home being added to the debt part of your DTI.)
anyway all this seems to say as long as the cash flow for all properties is positive, only PITIA from your principal residence is added to the debt part of DTI.
all this is supported by:
B3-3.1-08: Rental Income in the paragraph
You're always going to include PITIA for residential investment property included in your DTI. However, it's counteracted by your gross rents and some expenses as you stated which is different in two scenarios:
- You bought the property less than a year ago and the expenses are not yet on your taxes - Then 75% of your gross rents (or market rents if not rented) are used. Then no deductions are added back or used
- You have a rental history on your taxes, then your deductions are added back to counter the expenses.
Here the calculation your should be getting using your schedule E
- Gross Rents; minus
- Total Expenses;plus
- Insurance; plus
- Mortgage Interest; plus
- Taxes; plus
- HOA; plus
Equals your subtotal (X) of eligible income
Divide X/12 (months)=Y (monthly eligible income)
Subtract your current PITIA from Y= Z - Your total income available to offset your increase your DTI.
Do this on all your property and you'll know your total net income available to add to your application.
So yes, once you do this calculation, we wouldn't add additional expenses to your DTI. We just add Z as a positive or negative number to your income to either offset or increase your monthly debt.
Hope that's clear as mud, and answers your question.
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