Answer:Â This was updated in May, 2012.
Calculating Monthly Qualifying Rental Income (or Loss)
Federal Income Tax Returns / Schedule E.Â When Schedule E is used to calculate qualifying rental income, the lender must add back any listed depreciation, interest, taxes, or insurance expenses to the borrowerâ€™s cash flow.
If the property was in service:
- for the entire tax year, the rental income must be averaged over 12 months; or
- for less than the full year, the rental income must be averaged over the number of months that the borrower used the property as a rental unit.
Lease Agreements.Â When current lease agreements are used, the lender must calculate the rental income by multiplying the gross rent(s) by 75%. The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses.
See Treatment of the Income (or Loss) below for further instructions.
Treatment of the Income (or Loss)
The amount of monthly qualifying rental income (or loss) that is considered as part of the borrower's total monthly income (or loss) â€” and its treatment in the calculation of the borrower's total debt-to-income ratio â€” varies depending on whether the borrower occupies the rental property as his or her principal residence.
If the rental income relates to the borrowerâ€™s principal residence:
- The monthly qualifying rental income (as defined above) must be added to the borrowerâ€™s total monthly income. (The income is not netted against the PITIA of the property.)
- The full amount of the mortgage payment (PITIA) must be included in the borrowerâ€™s total monthly obligations when calculating the debt-to-income ratio.
If the rental income (or loss) relates to a property other than the borrower's principal residence:
- If the monthly qualifying rental income (as defined above) minus the full PITIA is positive, it must be added to the borrowerâ€™s total monthly income.
- If the monthly qualifying rental income minus PITIA is negative, the monthly net rental loss must be added to the borrowerâ€™s total monthly obligations.
- The full PITIA for the rental property is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation.
- The full monthly payment for the borrower's principal residence (full PITIA or monthly rent) must be counted as a monthly obligation.
Note:Â For DU loan case files, the term â€œsubject net cash flowâ€ applies to net rental income from the security property, and the term â€œnet rental incomeâ€ applies to rental income from properties other than the security property.