Schedule E income...what expenses to include/exclude for new loan

[Carlo Con]

I would like to qualify for a new home loan.  I spoke to 3 different home loan officers and they have given me different information each time.  Here's my scenario.

I bought my house in 2016 and started renting it out in 2018.  My mortgage is $1400 and I am now receiving $1700 from renters.  I am trying to remove my mortgage liability when I apply for a new loan.  My tax return is not filed yet, but it looks like this:

Rental income: $20,400

expenses: $11,857 (mortgage insurance, property taxes, PMI, and home insurance)

depreciation: $4,809

Schedule E profit: $3,734

I have an additional $2,500 worth of home expenses which I did not include because I want to reduce mortgage liability but at the same time get the biggest tax return possible.

Question 1:  Should I include additional expenses in tax return?  Will the underwriter reduce the amount of what I can be approved for because of additional expenses?  

Question 2:  Will my $1700 wash out mortgage liability.  One loan officer said told me that they would only take 25% of $1700, which is 1,275.  Another loan officer told me that 25% rule only applies to "departing resident" and that I would not only wash out loan, but have an additional income of $300 a month.  

[Stephanie Medellin]

@Carlo Con  When using Schedule E to determine rental income, you don't take 75% of the result to determine your net rental income or loss, so that is not correct.  

If you are using the lease agreement or rent survey from an appraisal to determine rental income, that is when 75% of rent is used.

From what you posted, yes, it looks like the $1700 would wash out the mortgage liability and you would have $300/month positive cash flow added to your income.  The mortgage payment would NOT be counted in your monthly liabilities, because it's already accounted for in that $300 calculation.

Yes, if you include additional expenses like a management fee, or commissions, maintenance, advertising, etc., those would not be added back and they would reduce the amount you can qualify for.

You take Schedule E profit of $3,734, and add back interest, insurance, taxes, and depreciation. Divide that number by 12, then deduct monthly PITI. The result is either net income or loss that will get added to your income or liabilities.