Debt to income and rental properties

4 Replies

If you buy a rental and you profit say $250.00 a month or even just break even, does the mortgage count against your debt to income ratio or does the rent cancel out the mortgage payment?

Thank you.

@David Soest Check around with different lenders, but most will only count 75% of the rental income and the full amount of the mortgage, so yes it will count against you.

Most lenders also look for the rental to be on your tax returns for 2 years before they'll count the rental income at all.  Again, shop around because policies may vary a bit.

Good luck!

- Tom

@David Soest  As long as the rental is on your tax return, I would give you 75% credit of the rent received. The debt does count against you. But with the two would hopefully wash each other out.

Upen Patel, Mortgage Banker

Federal NMLS# 1374243

Shop around and evaluate all the different rules! When we first got started and were really tight during acquisition times. It was almost like EVEYR penny counted. We found we couldn't do 15 year loans, we had to buy in the right months, etc. 

One of the biggest things I found is while there is one set of guidelines from freddy/fanny. Many brokers have different interpretations of those rules. Some counted 75%, some counted the profit on your tax returns (adding depreciation back) and other counted the lease value if it was before the first year. This was the time of acquisition where strategy almost to the month counted when acquiring the next property.  

Just my thoughts as someone who had to stretch EVERY penny in those early days.

Originally posted by @David Soest :

If you buy a rental and you profit say $250.00 a month or even just break even, does the mortgage count against your debt to income ratio or does the rent cancel out the mortgage payment?

Thank you.

 I would be able to use rental income whether it was on your tax return or not. Both Fannie and freddie (as of 10/26/15 or after) now do not require 2 years landlord experience (fancy speak for 2 years rental income on tax return) any more to use your rental income.

No one here has mentioned it correctly but its key to note that "rental income," calculation is different on primary occupied properties than it is from non owner/investment properties.

So to answer your question correctly as a non owner/investment property, yes it does offset your mortgage payment. If this number is positive its added to help you as qualifying income and if the number is negative it counts as a liability to be qualified for like any other liability such as a car loan or credit card,etc.

As a primary, lets say you have a fourplex and live in one unit and rent the other three units. You can use rental income as well but its added to your income column and NOT netted against the mortgage. What does this mean? Well short to say its not as effective as being "netted." 

If you had a 1000 mortgage payment you would need around 2222 gross income to qualify for this payment (assuming 45% max debt to income) however if your 1000 mtg payment had 1000 income it would be net ","0 which means you dont need to qualify for anything. So if income is added to the income column like in the case of a primary residence fourplex scenario then you'll need around 2.22X times whatever the payment is (in this case $1000) to qualify (assuming max 45% DTI). Hope that makes sense its the most simple way I can put it.

Others here have answered a question already that pertains to "how to calculate the rental income." This is another one that varies. If you have 1 year or 2 year of tax returns we'd need the average of 2 years or the most recent year / 12 months. If you dont have any tax returns filed yet we'd use 75% of gross minus your PITIA (principal/interest/tax/insurance/assessments). Easy right? 

Thats everything in a nut shell. Let me know if you have any questions on it.