How to get around with 75% rental income rule?

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How to get around with 75% rental income rule?

Rental Property Investor · Orlando, FL · Member since 2022 · 20 posts · 12 votes

I have three rental properties and am looking to purchase a fourth one. I have been using conventional mortgage for my properties. The three rentals all have okay cash flow which is at least positive. However, as many of you know, most lenders only use 75% of the rental income so from their perspective my cash flow would be actually negative. Also, I'm taking a huge pay cut for my new job. As a result, my DTI ratio is now greatly reduced due to this calculation method and my lower income. With that being said, I'm seeking for advice and tricks on gettting around with this 75% rule to allow me purchase my next property.

If anyone know lenders that are flexible with this 75% rule around Detroit area, please let me know. Thanks.

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Patrick Roberts

Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes

If your existing rental properties reported their financial performance on your most recent Schedule E, then your lender should be using a net cashflow analysis based on the Sched E figures for your DTI for those properties in most scenarios. If they have not reported on your Sched E yet, then 75% of the gross rent is appropriate. This is specifically for conforming loans.

If youre referring to the rental income from the new property that youre buying, then 75% of the gross rent for that specific property is what's used in almost all cases.

If DTI/income calc is the only thing holding you back, I recommend looking into DSCR loans. Most programs will use the full gross rent for the new property, not 75%.

I dont know all of the specifics of your scenario, but this is a general overview.

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Jaycee GreenePro Member
Real Estate Consultant · St. Louis MSA · Member since 2024 · 3k+ posts · 727 votes
1y
Quote from @Wenyu Zhang:

I have three rental properties and am looking to purchase a fourth one. I have been using conventional mortgage for my properties. The three rentals all have okay cash flow which is at least positive. However, as many of you know, most lenders only use 75% of the rental income so from their perspective my cash flow would be actually negative. Also, I'm taking a huge pay cut for my new job. As a result, my DTI ratio is now greatly reduced due to this calculation method and my lower income. With that being said, I'm seeking for advice and tricks on gettting around with this 75% rule to allow me purchase my next property.
If anyone know lenders that are flexible with this 75% rule around Detroit area, please let me know. Thanks.

@Wenyu Zhang Have you thought about buying the property using an LLC?
[email protected]
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Jay HurstBusiness Member
Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
1y
Quote from @Wenyu Zhang:

I have three rental properties and am looking to purchase a fourth one. I have been using conventional mortgage for my properties. The three rentals all have okay cash flow which is at least positive. However, as many of you know, most lenders only use 75% of the rental income so from their perspective my cash flow would be actually negative. Also, I'm taking a huge pay cut for my new job. As a result, my DTI ratio is now greatly reduced due to this calculation method and my lower income. With that being said, I'm seeking for advice and tricks on gettting around with this 75% rule to allow me purchase my next property.
If anyone know lenders that are flexible with this 75% rule around Detroit area, please let me know. Thanks.

How long have you owned the three rentals?
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Devin PetersonBusiness Member
Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 667 votes
1y
Quote from @Wenyu Zhang:

I have three rental properties and am looking to purchase a fourth one. I have been using conventional mortgage for my properties. The three rentals all have okay cash flow which is at least positive. However, as many of you know, most lenders only use 75% of the rental income so from their perspective my cash flow would be actually negative. Also, I'm taking a huge pay cut for my new job. As a result, my DTI ratio is now greatly reduced due to this calculation method and my lower income. With that being said, I'm seeking for advice and tricks on gettting around with this 75% rule to allow me purchase my next property.
If anyone know lenders that are flexible with this 75% rule around Detroit area, please let me know. Thanks.

It's the perfect time to learn about the advantages of DSCR loans. No traditional Fannie / Freddie overlays with vacancy rates. Use 100% of the gross rental income and no DTI! Take a look at the finder a lender tab at the top of the page, or I would recommend an experienced broker who can compare the top DSCR lenders for you!
[email protected]860-538-3672
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Patrick Roberts
Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
1y
If your existing rental properties reported their financial performance on your most recent Schedule E, then your lender should be using a net cashflow analysis based on the Sched E figures for your DTI for those properties in most scenarios. If they have not reported on your Sched E yet, then 75% of the gross rent is appropriate. This is specifically for conforming loans.
If youre referring to the rental income from the new property that youre buying, then 75% of the gross rent for that specific property is what's used in almost all cases.
If DTI/income calc is the only thing holding you back, I recommend looking into DSCR loans. Most programs will use the full gross rent for the new property, not 75%.
I dont know all of the specifics of your scenario, but this is a general overview.
2 Reply
Caleb Marks
Austin, TX · Member since 2022 · 7 posts · 6 votes
1y
Hey Wenyu - this sounds like the perfect opportunity to transition from conventional financing to using a DSCR Loan. Here are a few reasons why: 1) No DTI or personal finances considered outside of showing you have the cash to close, 2) Qualify with the rental income for the property you are acquiring (100% of it), 3) rates comparable to conventional mortgages, 4) close under an LLC and no credit reporting for the new loan.
Feel free to reach out for more information.
1 Reply
Dawn RoyBusiness Member
Real Estate Broker · Midlothian, VA · Member since 2017 · 77 posts · 41 votes
1y
As other responses have suggested....DSCR loan is a great option.
Cheers!
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Wenyu Zhang
OP
Rental Property Investor · Orlando, FL · Member since 2022 · 20 posts · 12 votes
1y
Quote from @Wenyu Zhang:

I have three rental properties and am looking to purchase a fourth one. I have been using conventional mortgage for my properties. The three rentals all have okay cash flow which is at least positive. However, as many of you know, most lenders only use 75% of the rental income so from their perspective my cash flow would be actually negative. Also, I'm taking a huge pay cut for my new job. As a result, my DTI ratio is now greatly reduced due to this calculation method and my lower income. With that being said, I'm seeking for advice and tricks on gettting around with this 75% rule to allow me purchase my next property.
If anyone know lenders that are flexible with this 75% rule around Detroit area, please let me know. Thanks.

Forgot to mention that, I’m actually buying the fourth property as my primary residence because of the new job.
0 Reply
Devin PetersonBusiness Member
Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 667 votes
1y
Quote from @Wenyu Zhang:

Quote from @Wenyu Zhang:

I have three rental properties and am looking to purchase a fourth one. I have been using conventional mortgage for my properties. The three rentals all have okay cash flow which is at least positive. However, as many of you know, most lenders only use 75% of the rental income so from their perspective my cash flow would be actually negative. Also, I'm taking a huge pay cut for my new job. As a result, my DTI ratio is now greatly reduced due to this calculation method and my lower income. With that being said, I'm seeking for advice and tricks on gettting around with this 75% rule to allow me purchase my next property.
If anyone know lenders that are flexible with this 75% rule around Detroit area, please let me know. Thanks.

Forgot to mention that, I’m actually buying the fourth property as my primary residence because of the new job.

You still have some favorable options available to you in the non-qm space.
[email protected]860-538-3672
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Derek BrickleyBusiness Member
Lender · Ann Arbor, MI · Member since 2021 · 668 posts · 227 votes
1y
Just going to second the DSCR comments! Here in the Detroit area especially you're able to get better terms than some other markets because the potential cashflow of each property can be more than in other areas of the country. Tons of people already have responded but if you have any other questions about how that might work here feel free to reach out!
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Drew SygitBusiness Member
Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
1y
@Wenyu Zhang get your 2024 1040 filed ASAP, so lender will use properties income/loss there versus the 75% of lease.
Lenders add back depreciation (paper loss only), but you may want to be careful how many other expenses you claim.
Any losses you show will be counted as a debt payment against your DTI.
[email protected]248-209-6824
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Mike GrudzienPro Member
Lender · Eugene, OR · Member since 2019 · 2k+ posts · 1k+ votes
1y
Do a DSCR.
0 Reply
Account Closed
Rental Property Investor · New Braunfels, TX · Member since 2022 · 409 posts · 408 votes
1y
Quote from @Wenyu Zhang:

Quote from @Wenyu Zhang:

I have three rental properties and am looking to purchase a fourth one. I have been using conventional mortgage for my properties. The three rentals all have okay cash flow which is at least positive. However, as many of you know, most lenders only use 75% of the rental income so from their perspective my cash flow would be actually negative. Also, I'm taking a huge pay cut for my new job. As a result, my DTI ratio is now greatly reduced due to this calculation method and my lower income. With that being said, I'm seeking for advice and tricks on gettting around with this 75% rule to allow me purchase my next property.
If anyone know lenders that are flexible with this 75% rule around Detroit area, please let me know. Thanks.

Forgot to mention that, I’m actually buying the fourth property as my primary residence because of the new job.
DSCR won’t work for your primary. It has to be an income producing property for DSCR loans.
1 Reply
Brittany MinocchiBusiness Member
Lender · Massillon, OH · Member since 2022 · 1k+ posts · 486 votes
1y
Patrick did a great job explaining. If you've owned the properties long enough for them to be reporting on schedule E of your taxes, that income should be averaged out. If you recently acquired them or they aren't reporting on taxes and you have to use lease agreements or market rents, then 75% will be used.
[email protected]330-354-6590
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Ericka Parrott
Residential Real Estate Agent · Atlanta, GA · Member since 2009 · 381 posts · 134 votes
1y
Many people do a new LLC per rental property and skate around this issue.
0 Reply
Jacqueline Wright
Lender · Nashville TN, USA · Member since 2024 · 142 posts · 30 votes
1y
Explore DSCR Loans (Debt Service Coverage Ratio Loans):

Unlike conventional loans, DSCR loans focus on the cash flow of the property itself rather than your personal income or DTI.

If your rental income covers the mortgage and expenses based on their ratio requirements, you may qualify.
Leverage HELOCs or Equity from Existing Properties:
Use a home equity line of credit (HELOC) or cash-out refinance on one of your current properties to fund the new purchase. This avoids needing a conventional loan altogether.
If you're targeting Detroit, reaching out to real estate investor groups or brokers familiar with local lenders might lead you to institutions or programs that are more flexible with these requirements.
0 Reply
Ryan Maggard
Lender · Cleveland Ohio · Member since 2025 · 42 posts · 1 vote
1y
Best option if you have 20% down is a DSCR loan, we offer I/O payments on them as well. No DTI hits
0 Reply
Wenyu Zhang
OP
Rental Property Investor · Orlando, FL · Member since 2022 · 20 posts · 12 votes
1y
Quote from @Patrick Roberts:

If your existing rental properties reported their financial performance on your most recent Schedule E, then your lender should be using a net cashflow analysis based on the Sched E figures for your DTI for those properties in most scenarios. If they have not reported on your Sched E yet, then 75% of the gross rent is appropriate. This is specifically for conforming loans.
If youre referring to the rental income from the new property that youre buying, then 75% of the gross rent for that specific property is what's used in almost all cases.
If DTI/income calc is the only thing holding you back, I recommend looking into DSCR loans. Most programs will use the full gross rent for the new property, not 75%.
I dont know all of the specifics of your scenario, but this is a general overview.

That's a great answer. But what if I have "negative" cashflow on the tax return since I'm taking advantage of property depreciation? Would the lender still consider my net cashflow as negative?
2 Reply
Jaycee GreenePro Member
Real Estate Consultant · St. Louis MSA · Member since 2024 · 3k+ posts · 727 votes
1y
Quote from @Wenyu Zhang:

Quote from @Patrick Roberts:

If your existing rental properties reported their financial performance on your most recent Schedule E, then your lender should be using a net cashflow analysis based on the Sched E figures for your DTI for those properties in most scenarios. If they have not reported on your Sched E yet, then 75% of the gross rent is appropriate. This is specifically for conforming loans.
If youre referring to the rental income from the new property that youre buying, then 75% of the gross rent for that specific property is what's used in almost all cases.
If DTI/income calc is the only thing holding you back, I recommend looking into DSCR loans. Most programs will use the full gross rent for the new property, not 75%.
I dont know all of the specifics of your scenario, but this is a general overview.

That's a great answer. But what if I have "negative" cashflow on the tax return since I'm taking advantage of property depreciation? Would the lender still consider my net cashflow as negative?

@Wenyu Zhang If your lender isn't adding back the depreciation to your net income....you're dealing with the wrong lender!
[email protected]
1 Reply
Patrick Roberts
Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
1y
Quote from @Wenyu Zhang:

Quote from @Patrick Roberts:

If your existing rental properties reported their financial performance on your most recent Schedule E, then your lender should be using a net cashflow analysis based on the Sched E figures for your DTI for those properties in most scenarios. If they have not reported on your Sched E yet, then 75% of the gross rent is appropriate. This is specifically for conforming loans.
If youre referring to the rental income from the new property that youre buying, then 75% of the gross rent for that specific property is what's used in almost all cases.
If DTI/income calc is the only thing holding you back, I recommend looking into DSCR loans. Most programs will use the full gross rent for the new property, not 75%.
I dont know all of the specifics of your scenario, but this is a general overview.

That's a great answer. But what if I have "negative" cashflow on the tax return since I'm taking advantage of property depreciation? Would the lender still consider my net cashflow as negative?

Depreciation and other noncash and one-time expenses will be added back to the cashflow. Actual, cash-based expenses will not, such as legal fees, management expenses, maintenance, etc. If you reported a ton of expenses and still have negative cashflow after adding back the non-cash items like depreciation, the loss will be treated like a liability/debt payment on your DTI.
If you were buying a rental property, a DSCR loan would address this issue. Since youre buying a primary residence, a bank statement loan may be a better fit if you cannot qualify for conventional or govvy loans. If you have strong cashflow in your bank accounts but show minimal income for tax purposes, then a bank statement loan might help.
2 Reply
Ko KashiwagiPro Member
Lender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
1y
Hi Wenyu,
You can do a bank statement loan to qualify without tax returns if that's an option or you can use a no-doc solution. Terms won't be as favorable as conventional though.
310-848-9776
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River SavaPro Member
Lender · USA · Member since 2022 · 1k+ posts · 1k+ votes
1y
As others have mentioned, a DSCR sounds like it would be a great option for you as your DTI does not come into play.
The mainf factors that do are the DSCR ratio, LTV, and your credit score. You can also go through an LLC if you'd like. For cash outs, most lenders are capped at 75% LTV. However, seasoning will come into play to determine the appropraite leverage. Happy to connect and chat further!
[email protected]
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