how do banks calculate income for an existing rental

[David Mirza]

I understand that for a Fannie Mae conventional loan, if you don't have tax returns for a rental, most lenders will count 75% of your rent as income and the full PITI as your debt. The part where I'm not clear on is for an existing rental where tax returns are available.

I know that Principal, Interest, and taxes are all included as debt.  Depreciation is not counted as an expense.  What about one time repairs like fixing a leaky roof?  How about expenditures that are depreciated over 7 years like a new fridge?  

[Chris Mason]

@Gloria Mirza didn't you ask a very similar question like 3 days ago or am I going crazy?

We will use actual rent and actual expenses according to your tax returns, if you've had the properties long enough for them to show up on tax returns, and from there we will do some VERY wonky calculations. (There are actually three entirely different sets of wonky calculations, depending on the exact situation, that I will not bore you with.)

What you need to know, however, is that if [rent * 75% - PITI] works and yields a positive number, and if the home actually makes money, and if you haven't lied on your tax returns, then the wonky calculations that we do will not throw you off - and in all likelihood will actually improve your DTI.

> What about one time repairs like fixing a leaky roof? 

Your lender should know how to exclude those from the arithmetic, and what documentation from you is required to justify it.

> How about expenditures that are depreciated over 7 years like a new fridge?

Depreciation can be added back in almost all cases.