Does rent from Primary Residence reduce my Debt to Income ratio

Question

I have been a member of Biggerpockets for a while and absorbing as much knowledge through the forums and experienced members. I currently have 2 rentals and a high priced primary.

I am currently trying to increase my rental portfolio by buying foreclosures but i might be limited to loans due to my loan on my primary residence.

Can i rent out my primary residence and use the income to reduce my debt to income ratio so i can obtain additional  loans for rental property. And will i need to reduce my primary residence mortgage to 75% LTV before the rental income can count.

Dave Toelkes · Answer

I realize that this is an old post, but there is a lot of misinformation in this thread regarding rental income and calculating DTI.

Here is how it works.

1.  Add up the total of your gross monthly income from wages/salary, child support, alimony, commissions, etc.  For this portion of the income calculation, rental income is not included.

2.  Add up all your monthly recurring debt obligations that will not be paid off within six months.  Primary residence mortgage, HOA fees, car loans, minimum  payment on credit cards, student loans, personal loans, etc.  For this portion of the debt calculation, rental expenses are not included.

3.  Now, look at your tax return Schedule E.  Take 75% of your annual rental income and subtract 100% of your annual rental expenses.  Do not include depreciation in your calculations.  Divide the result by 12 to get your monthly NET rental income or NET rental liability.  If the answer is a positive number, you have income, otherwise, you have a monthly liability.

4.  Add the net monthly rental income to your gross monthly income in step 1.  Or, add the net monthly rental liability to your monthly debt obligation in step 2.

5.  Divide the total monthly debt obligation by your total monthly income to get your DTI.

Jake Kucheck · Answer

If you had someone buy your property with an AITD, you could structure it so you maintain the upside in the property and your debt obligation on the property goes away.  This is better for your DTI if 100% of your debt obligation is greater than 75% of your rental income.  Just a thought.

Bruce Runn · Answer

Where in this calculation does my rental property debt get added as I had an loan adjustor tell me I might not qualify since all my properties mortgages added together causes me to have too high a debt/income ratio even though I make money on all properties and have a very good "job" income on top of rental income?  Or since that is part of my expenses on schedule E, it's already in the calculation?  Thanks

Bruce Runn · Answer

So I have  income tax state income and "net" rental income + depreciation spread over the average of the last two years.  Is the debt my primary residence+ car loan or those two plus the debt from my investment mortgages?  Thanks

Dave Toelkes · Answer

@Bruce Runn

When using tax returns, the debt service is already included in the expenses.  Many lenders are now only considering rental income if it appears on at least two years tax returns.

Since this was posted, the underwriting guidelines have changed.  Now, the lender will just total the net rental income on your two most recent tax returns, then add back in the depreciation.  That amount is divided by 24 (to get an average monthly rental income/loss). No 75% of income minus 100% of expense calculation any more.  Just the two years averaged to get a monthly net rental income/loss number.  You may notice that the principal portion of a mortgage payment does not appear on the tax return.  No matter.  It is usually such a small number, in relation to the mortgage interest expense, that the principal portion is ignored.

Now for another change to the procedure I outlined a couple years ago.  If you have a net rental income, it is still added to your other income to compute the DTI.  However, if you have a net rental loss, the loss is subtracted from your other income, before computing the DTI.  This way of handling rental loss is supposed to be more favorable for the borrower, but I have not really run any numbers to verify it.

Dave Toelkes · Answer

Every lender has their own processing and underwriting guidelines.  If you have a track record as a landlord, some lenders will include newly acquired properties if you have an annual lease.

However, they all calculate Debt to Income ratio the same way.

Jeff Thompson · Answer

Dave T Thats the most concise explanation I've seen, good job!  I'll just add I spoke with my local bank yesterday(tri counties bank) about counting rental income, here's what I was told:  If you have two years of rental experience on your tax returns they will count income on all your rentals, even new ones.  I'd have to be able to show signed leases with paper trails of deposits and payments to count them. (if in the first month just the deposit is ok).  I don't know if this is typical though.

Oluseye Faleye · Answer

@ Brandon

I had the same occur when i was renting my old residence which was converted to rental because i was posted overseas. When i came back to buy a new primary residence, i was told to increase the equity on my rental to 75%.

However since i am buying another investment property and not a primary, my broker says that the rental income on my current primary residence will offset my DTI.

Brandon Kamm · Answer

I know these rules change all the time, but i had to go through this in buying a new house in March.  We rented our previous house but could not claim the income on our DTI ratio as it was not included on a tax return. In getting the new loan we had to factor in the mortgage on the new and old house but no rental income from the old house to calculate DTI

Oluseye Faleye · Answer

However, i spoke to my Broker who says that as long as i have a renter in there and a copy of the lease and security deposit, i should be able to get a loan and be okay. I will be using a private lender, so are they subject to fannie Mae and freddie mac guidelines.

Does rent from Primary Residence reduce my Debt to Income ratio

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