How Rental Income is Considered when Qualifying for Financing

The issue of how the DTI (debt to income) will be considered depends on if you are applying for a new loan during the year in which you purchase in which case you have not yet filed a tax return to claim the rental property will be 75% of gross rents evidenced by lease agreement and copy of the security deposit check minus the PITIA (principal interest taxes insurance assessments - per month). If that number is positive its added to your income figure if its negative you have to qualify for it as a monthly obligation similar to a car or min credit card payment via the typical 43-50% debt to income ratio depending on where your reserves/assets/credit are.

If you've held the property long enough and filed rental income the schedule E of your tax return (or corporate return) will be used to determine the net income.

The formula for net qualifying income once the tax return is filed is made to seem complicated however in essence it is the monthly average net operating income(NOI) based on tax return minus monthly debt service payment. Like the part above, if this number is positive its added to income, if its negative its counted as a monthly obligation you'll have to qualify for in your ratios.

So strategically planning your rental properties, wage, dividend, interest, business cash flow filed from entities, and other income is very crucial to conventional lending DTI because its the formula from which we judge whether to give you a loan and for how much. You could have flawless credit 850 fico and 90% down payment but if your DTI is off you will not get a loan with conventional financing. Portfolio is another story....(asset depletion, pledging collateral, cross collateralization, stated income, 12 month bank statements no tax returns, etc etc)

I recommend my clients project their business plans out 2 years so they can claim just enough income to qualify for what they intend to acquire and not more depending on a fine balance between income display and tax strategy. A use of accelerated depreciation on real estate assets can sometimes make a property look like a paper loss while in reality it cash flows like no other. As a lender we only look to determine cash flow not accounting/paper loss.

With 5+ units/commercial/business its more make sense and mostly about the 5C's.