If you own a rental, the lender works out whether it helps you or costs you. Many rentals come out better on the lender's worksheet than on the tax return, because depreciation and mortgage interest, the two biggest reasons a rental shows a loss, are both added back.
Two ways a lender counts a rental
- It's on your last tax return. The lender works from Schedule E, the page where you reported the rent and expenses.
- You bought it or started renting it since then. The lender uses 75% of the rent on the lease, or the appraiser's market rent on a property you're buying.
Either way, the full monthly payment on the property comes off at the end. A positive number is added to your income, and a negative number is added to your monthly debts.
The Schedule E worksheet, line by line
| Schedule E | What the lender does |
|---|---|
| Line 3, rents received | The starting number |
| Line 20, total expenses | Subtracts it |
| Line 12, mortgage interest | Adds it back |
| Line 16, taxes | Adds it back |
| Line 9, insurance | Adds it back |
| Line 19, HOA dues listed by name | Adds them back |
| Line 18, depreciation | Adds it back |
| A one-time repair or casualty loss | Adds it back, with a receipt |
| Line 2, fair rental days | Divides by 30 to get the months rented |
| The full monthly payment | Subtracts it after dividing by the months |
A rental that loses money on paper
Rents received were $24,000 and total expenses were $26,000, so the tax return shows a $2,000 loss. Inside those expenses were $8,400 of mortgage interest, $3,600 of taxes, $3,000 of insurance and $7,200 of depreciation. The place was rented all year, and the full payment is $1,550 a month.
- $24,000 minus $26,000 is a $2,000 loss.
- Adding back $22,200 brings it to $20,200 for the year, or $1,683 a month.
- Subtracting the $1,550 payment leaves $133 a month.
A rental that lost $2,000 on the tax return adds $133 a month to this owner's income.
A rental on a lease
A single-family rental bought after your last tax return leases for $2,200 a month, and the full payment is $1,700. Lenders count 75% of the rent, or $1,650. That's $50 short of the payment, so $50 a month goes into the owner's debts.
Landlord experience
Fannie Mae counts positive rental income once you've managed rental property for 12 months. With less than that, the rent can cancel out the property's own payment, which keeps the payment out of your debts, but anything above it waits until you reach 12 months. A shortfall counts against you either way.
What to have ready
- Your last one or two tax returns with Schedule E
- The signed lease for any rental not on your last return
- Your latest mortgage statement for each rental, plus the tax bill, insurance declarations page and HOA statement if they aren't in the payment
Where this number goes
Add a positive figure to your monthly income when the approval calculator asks for it. Add a shortfall as a monthly debt under other loans. If you own several rentals or hold them in an LLC, call AAA Capital Funding at 888-601-8344 and we'll run each one with you.