Debt to income or no

13 Replies

I have 5 rental properties now but am concerned my debt to income could be a problem soon to finance more properties. I know a big determining factor with banks is your tax returns and how much you actually made that year after expenses. Do I always want to take the maximum deductions and make my income lower which may look bad to a bank but better for paying lower taxes or maybe not take all deductions so my debt to income looks better but pay higher tax? What is the general thinking on this subject, I'm trying to think more long-term. Thanks!!

Most lenders will add back depreciation to increase your actual qualifying income. Other deductions (repairs, expenses etc) are not added back. A good lender will discuss strategies with you before you file your tax return so don’t hesitate to ask them. They want you to show as much qualifying income as possible and many times there’s still a way to do that with minimal increase in your tax liability.

I’ve actually noticed most lenders just take my rent times .75 and minus my piti from that. They show me having more income than I actually take personally

Originally posted by @Caleb Heimsoth :

I’ve actually noticed most lenders just take my rent times .75 and minus my piti from that. They show me having more income than I actually take personally

How do they verify your incoming rent?

I usually just provide the lease, and then they compare the leased amount to the PITI that shows up on my credit report


@Nicholas Preston , if you referring to GSE agency loans (Conventional loans), then lenders will look at your Tax Returns first. Then, they'll look at the ownership history of the subject property to see if using your tax return is appropriate, lease or market rent comps.  If you have a history of the property on your tax returns, then that is most likely the one that lenders will use.  That said, if for example, you bought the property in June of 2017 and thus it's not reflected on your most recent tax return because it's not due until April of 2018, then lender will use the lease less 25% to account for vacancy.  Another example, if you bought your property in June of 2016, renovated, and then rent it in October, and your tax return showed Fair Market Rental Days was only 90 days that year, then lenders will average based on the 90 days provided that the lease is inline with what you received for that 90 days.  This is a critical thing that sometimes, I see CPA and clients not specify on their tax returns. 

If property has a history of being on your tax return, if you have a mortgage on the property, and taxes and insurance are escrowed then this formula is what is acceptable for agency loans. 

Total Rent - Total Expenses + Depreciation + annual property taxes + annual hazard insurance

Read more on FNMA guideline for lenders:

https://tinyurl.com/y9a6tzp6

Paul Defngin, Lender in (#NMLS 199791)
240-268-3054

@Nicholas Preston , and sometimes if you have amortization on your tax return, that can be added back too, as well as any items that you spent that are considered one time expenses.  The latter, you have to be sure to have good records such as invoices of what would be considered a one time expense.  For example, say you bought a property and you put in a new HVAC and you showed that in your tax return (key is to itemize it, so ensure that you or your CPA do a good job of listing it as a separate line or even as a statement on your 1040); you provide your lender that invoice, then they should be able to negate that from the total expenses shown on your tax return since it's not likely to be something that you'll spend on for a number of years. 

Should you have any questions, feel free to reach out.  Take care.

Paul Defngin, Lender in (#NMLS 199791)
240-268-3054

So how would they confirm the rent if you didn't have a mortgage and just owned the properties free and clear? Just look at the lease and confirm you own the property?

Originally posted by @Derek E. :
Originally posted by @Caleb Heimsoth:

I’ve actually noticed most lenders just take my rent times .75 and minus my piti from that. They show me having more income than I actually take personally

How do they verify your incoming rent?

 Your taxes!

All of your properties and their incomes are listed on your taxes.  So, the lender will use that.  IF the property is new, and hasn't been added to your taxes yet, they can take a rate of 75% of rental comps to figure what kind of income that property will provide.  An executed lease will also be acceptable, but be prepared as the lender will only take 75% of that as well.

As long as your properties are cash flowing, and your repairs and expenses aren't tipping the scales into a negative cash flow for the year, they should cancel out their own debt and not show on your DTI.

Another idea is to consider a purchase with tenants already in place.  This way, the income is available for the initial purchas, and not afterwards.  Again, they will only be able to use up to 75% of the rental income, but that should help you too.

Yeah they take the leased amount times .75 and minus the PITI on my credit report. Then add it together

@Nicholas Preston

I always take into consideration how the banks look at my taxes and determine my income, so I can continue to grow.  They do not count depreciation, so here is a calculator to use off your schedule E so you can see how it is calculated https://www.biggerpockets.com/files/user/chicagobr...

Brie Schmidt, Real Estate Agent in Illinois (#471.018287) and Wisconsin (#57846-90)

Thanks everyone! Have heard a lot about deals and quite a few aspects of real estate but not much about this topic until now.

I like the point Cara Lonsdale makes, buy properties with tenants already in place. It buys you 75% of the rental income for consideration.  

Edit....@Nicholas Preston forgot and incorrectly did not add other important components in the formula. My apologies.

See below for a property that is on your tax return and is mortgaged:


Total Rent - Total Expenses + Depreciation + Mortgage Interest + annual property taxes + annual hazard insurance averaged 2 years if listed on your return 2 years or 12 months if listed on return 1 year.

Now, if property was only rented for a certain time and it is documentable, then underwriters can justify using the lease less 25% for vacancy to qualify.

Paul Defngin, Lender in (#NMLS 199791)
240-268-3054

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