How do banks look at rental income on tax returns?

[Joshua Powell]

Hi everyone! Right now I'm in the process of getting preapproved for my second house hack. Currently live in a side by side duplex I purchased in September of 2019 where I get $1195 on one side and $450 per each bedroom(2) on my side, so the cashflow is great! With that being said I'm having a lot of difficulty getting this preapproval because Im already running into DTI issues. I'm a bartender and haven't claimed all my tips so my income is only $40k for 2018 and 2019 (I know, big mistake looking back at it), and even though I started doing that more this year, because of a furlough with the shutdown Im still only going to make $40k this year again. I was fortunate to find a bank that will use 75% rental income from both sides of my duplex even though they have only been rented since this past March (plan on renting the other bedroom out once I move out) and use 75% of future rental income of whatever duplex I chose to buy, so my DTI should still be okay with this property, but that leaves my a cause for concern for next year for acquiring future properties.

Since next year will be 2021 I'm assuming there going to go based off of my tax returns for 2020 as far as rental income, and I'm a little confused how banks look at that income. I was told not to write off too much as banks won't use any of the income that is written off, but that doesn't seem right as that would mean any Real Estate investor trying to show as much income as possible for loan purposes would be paying big tax hits every year. Is there a certain way you need to structure writing off your expenses so banks will still use your rental income? It almost seems it's better to use banks that will use lease copies instead of tax returns since they will most likely use 75% of that, which could be more than whatever you net income shows after expenses and write offs.I u nderstand this is more of CPA/MLO questions and plan on reaching out for a few answers, but figured I might get at least some it cleared up here first. Sorry if this post is a little disorganized, just trying not to shoot myself in the foot for this upcoming year!