I've recently heard that if an investor files loss in his investment property in filling his tax, it will effect his next mortgage by impacting on debt/income ratio.
For example: If you earn $10000 from your rental property and in your tax you show that you had $15000 expense (= $5000 loss), the next time you are applying for a mortgage for another property, $5000 will go toward your expenses (5000/12 for each month) and it will impact your debt/income ratio.
Does anyone have an insight about this? Is this a true statement.
Thank you all in advance
It depends on the reason for the loss.
First of all, depreciation is added back to any losses.
Secondly, if the loss is due to vacancy which has since been filled, that is taken into account.
Thirdly, repairs and maintenance are generally added back in as well.
Overall, debt to income is your overall monthly debt and housing payments (including HOA) to your GROSS income.
So in your example, I'm going to make the following assumptions:
10,000 income (was vacant for 2 months - actual rent is $1000 per month
6,000 mortgage payment
1,000 utilities during vacancy period
On your tax return, you don't actually get to deduct the principal portion of the mortgage payment, so your loss will be something less than 5,000. But the total payment is used to calculate debt to income ratio.
So in your case, you're mortgage broker would look at
1,000 per month income
500 per month mortgage
167 per month HOA
so you'd have $667 debt to 1,000 income ratio or 66.7%
Some mortgage brokers will only allow 75% of the income, so you'd then have $667 to $750 or 89%.
I am not sure how Bankers look at it, but I have usually managed to have a loss on my taxes for my rentals, but banks have been lending to me for 20 years in spite of that. If you do a cash flow chart that takes out depreciation that might help some.
@Linda Weygant With this approach, every newly purchased (and mortgaged) property is almost guaranteed to raise your total DTI ratio.
Let's say the target max DTI for a conventional mortgage product is 40%. If the borrower has a DTI of 35% with all rental properties excluded, but a DTI of 43% with rental properties included, is this generally still an acceptable scenario?
In the abstract, there's a big difference between debt that's used to increase your net income (and is backed by an asset) ... seems like simple DTI maximums would ignore that. How do underwriters approach this?
Agreed - many newly mortgaged properties will raise your DTI. So the underwriter looks to see where you are now with ALL sources of income and debt vs where you'll be after the purchase and applies their maximums appropriately.
The brokers I have worked with would not allow the 43% DTI as in your scenario, @Justin R.
So the key is to either buy a rental such that it does not send you over the maximums or reduce your other debt or increase your other income until the ratios work.
It's this exact reason why some people will tell you to pay off your car or your student loan or your credit card debt before applying for a mortgage as all that debt counts against you. You'll also see advice out there to get a second job for several months before applying so that the income from that is counted in your favor.
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