I am applying for a mortgage. I have 3 rental properties on 2 years worth of tax returns (2011 & 2012). They all are cash flowing and show positive on my tax return (even after depreciation). They all became rentals some point in 2011 (halfway into the year on average). I was just told the mortgage company is taking my net income from the rentals, adding back depreciation, Taxes and insurances and then dividing by 12. They then take that number and subtract the mortgage payment (PITI). They do this for each year, add them together and divide by 2. They are getting a negative number and telling me this hurts my DTI ratio.
I have two issues with this. First, when they add back Depreciation taxes and insurance they don't add back the interest exp. When they deduct the mortgage payment that also includes the interest expense. They are essentially double counting the interest payment?

Has anyone heard of it calculated this way? Since I now have 2 years tax returns I was expecting them to just take the next income add back deprection and divide by 12 (24 for both years).

I also wish they did not divide 2011 by 12 as some properties I did not even own the whole year and none were rental properties until early summer.

I have heard before I have 2 full years tax returns its Rent *.75-PITI. Either of these other ways gives me cash flowing properties but when they double count the interest it puts me in the red. I do have two 15 and one 20 year mortgage properties so payments are higher then if spread over 30 months, but they still cash flow!

*This is a mortgage broker who will end up selling the mortgage*
Is this new to anyone else they way they are calculating this? The mortgage processor explained when he was taught he did the Net income plus depreciation but when he started working at this company they have him do it this way?
Thanks!
Daniel