How Do Rentals Affect DTI?

[Brandon G.]

So when trying to get a new loan, I know lenders want to see the applicant's debt to income ratio below a certain figure. I am curious how rental income is calculated in the eyes of the lender and how that plays into the DTI.

For example, I know a rental with positive cash flow can report as a loss for tax purposes due to depreciation. Do lenders use the tax statements (which may be showing a negative income) when calculating DTI or do they use other means?

[Doug McLeod]

Most lender dealing with conforming Fannie/Freddie loans will not count rental income until you've shown it on one or two tax returns. After that, they typically count 75% of the rent as income including any new rentals, so you take a hit to your DTI on the first one until it's been on your tax return for 1-2 years. The gain/loss after depreciation and interest and taxes doesn't seem to matter. You may show zero taxable RE income but still have 75% of the rent counted as income.

I was fortunate to keep my first home as a rental.  When I started buying rentals several years later, I had no issue getting mortgages and each additional rental added to my income, so I was able to finance several properties in a short time frame.