Does lenders subtract paper rental losses from your W2 income?

7 Replies

Hi,

Aside from my primary residence property I have rental property that is generating profit before depreciation, but shows a loss after depreciation. Will that affect me negatively when i try to get another mortgage ?Will they  apply that loss to my ordinary income?

Originally posted by @Sheng Wong :

Hi,

Aside from my primary residence property I have rental property that is generating profit before depreciation, but shows a loss after depreciation. Will that affect me negatively when i try to get another mortgage ?Will they  apply that loss to my ordinary income?

 Many lenders will "add back" the depreciation (among other things). Not all, or most. But many. It's a great question to ask when you're "dialing for dollars," you've got to qualify your prospects. 

@Sheng Wong : Usually they will 'discount' the income per month. For example: If you have $1000 in rent received, they will give you 'credit' for $800 a month. If your mortgage note is $500 a month, you now have a DTI (debt to income ratio) of 62.5% on this one property. Ouch!

After a couple of those, you become personally unable to buy more properties as your DTI is 'too high', unless you make a $hitload of money OR some of the properties are paid off.

Hope that helps.

Alan

Good Morning @Sheng Wong

It really depends on the specific mortgage program that you are applying for. There are programs for instance that can look at other factors, besides just your W2. They are tailored specifically for real estate investing.

@Sheng Wong Under conventional loan depreciation will be add back in calculations when we prepare worksheet. 

If you bought the properties in 2017 and haven't prepared your 2017 tax returns yet, or if you have bought any properties this year which wont show until you prepare your 2018 tax returns, they will count 75% of the gross rent against your PITI. If its a positive, they will count it as part of your income. If its a negative, they will count it as part of your debts. If you have properties currently listed on your schedule E for your most recent two years tax returns, then they will take the net profit or loss and add back in Depreciation, Taxes, Insurance and Mortgage interest for each individual property listed. They then average each total over 12 or 24 months (depending on if that property is on your most recent two years tax returns, or just the last one) and subtract the current PITI from that. If the final number for each property is a positive, then they add it as income. If its a negative, they count it as a debt. If you counted a major repair expense, you CAN count it, just depends if it was a one time thing, or if it was necessary to get the house rentable, etc.

In most cases, if a client has a mortgage, even after adding back in those deductions, averaging and then subtracting the current PITI, it still comes out to some sort of small loss. As a result, the more properties you acquire, generally the harder it gets to continue to qualify for more from a DTI standpoint, plus you need reserves for each property that is financed. That is where portfolio lending starts to become more attractive as there are numerous options that don't take into account what your tax returns show and may not require as much in reserves, albeit at the cost of a higher rate and a little more out of pocket.

Originally posted by @James Zettelmeyer :

If you bought the properties in 2017 and haven't prepared your 2017 tax returns yet, or if you have bought any properties this year which wont show until you prepare your 2018 tax returns, they will count 75% of the gross rent against your PITI. If its a positive, they will count it as part of your income. If its a negative, they will count it as part of your debts. If you have properties currently listed on your schedule E for your most recent two years tax returns, then they will take the net profit or loss and add back in Depreciation, Taxes, Insurance and Mortgage interest for each individual property listed. They then average each total over 12 or 24 months (depending on if that property is on your most recent two years tax returns, or just the last one) and subtract the current PITI from that. If the final number for each property is a positive, then they add it as income. If its a negative, they count it as a debt. If you counted a major repair expense, you CAN count it, just depends if it was a one time thing, or if it was necessary to get the house rentable, etc.

In most cases, if a client has a mortgage, even after adding back in those deductions, averaging and then subtracting the current PITI, it still comes out to some sort of small loss. As a result, the more properties you acquire, generally the harder it gets to continue to qualify for more from a DTI standpoint, plus you need reserves for each property that is financed. That is where portfolio lending starts to become more attractive as there are numerous options that don't take into account what your tax returns show and may not require as much in reserves, albeit at the cost of a higher rate and a little more out of pocket.

 If it shows a loss aginst the piti do they add my whole mortage payment to the debt or just the loss amount? Thanks for the reply! 

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