Let me elaborate a little on Mrs. Vellios' and Mr. Butterfield's answers:
First, when you are buying a 2nd home, you are not buying anything you are going to rent out, so projected rental income from the second home is not part of the equation.
There are two ways rental income is used in underwriting a loan.
First, there is the 25% of income is for maintenance and vacancy convention which is used in automated underwriting. This is figured by taking the total income from the rental and subtracting the total cost of debt, hazard insurance, and tax service on the property. If the answer is a positive number, then that number is multiplied by 75% to get the final estimated profit. That number is then included in the borrower's income. If the net income is negative, is less than zero, 100% of it is SUBTRACTED from the borrower's income. Whatever the final result is will be the number the automated underwriting system will use for determining loan eligibility.
Second, the schedule E is examined by a human underwriter to see if the expenses and income reported appear reasonable. Usually, the human underwriter can adjust the loan amount the borrower is eligible for downward based upon his review, but cannot adjust the loan upward. This is because the automated underwriting criteria are used as the benchmark for when the loan is sold by the originator to the investor who then plans to keep the loan till it is paid off. These transactions are done in bulk, and the underwriting that supports the automated result is used to assure that there is some actual truth to the automated result. The investor has neither time nor inclination to review the human underwriting to see if a higher amount than the automated answer is justified, so it assumes it won't be and rejects any loan that shows a higher than automated result was used to figure loan eligibility.
The exception is those rare cases where the borrower brings enough extra to the table in the form of a profitable relationship, that the originating bank does not sell the loan to an investor but keeps it in its own portfolio. In other words, if you are not the owner of a company that will bring millions of dollars in cash flow to a bank in other business, don't expect a bank to adjust the eligible amount to borrow upward based upon the numbers in the schedule E.
I would be happy to originate your second home loan for you. I work at High Tech Lending as a loan officer. You may call or write me at the contact information below.
If the taxes show a significant loss for the rental due to expense write offs, they will take the loss against your income. For example, if you claim 10,000 in rental revenue but write off 20,000 in expenses, they will count a negative 10,000 for your annual income.
Eric Olfred Nelson, III
Sr. Mortgage Planner
NMLS # 120412
CA DRE # 01258488
Each situation is different.
Have an amazing day!
Banks will generally count 75% of the rental income for a property that is purchased for investment purposes.
Charles Butterfield MBA
Real Estate Broker/REALTOR
Cell Phone: (408)509-6218
Email Address: email@example.com