How to count rental income toward a mortgage

Written by david rouse
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How to count rental income toward a mortgage
A two-year history of owning rental property is required when using rent to offset a mortgage. (home sweet home image by David Dorner from

Owning rental properties usually means financing rental properties. Most mortgage lenders will not finance multiple properties under one loan. Each rental home is like its own business. Each home has expenses and income that are unique to the property, including having its own mortgage. Because each mortgage has its own mortgage payment, most investors could not qualify for more than one or two rental properties without rental income. Mortgage investors require stricter guidelines when lending on these properties due to the extra risk investment property mortgages naturally have.

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    Document that you have at least two years' history of owing rental properties. Provide the lender with your most recent two years of tax returns. This documents your history of managing rental properties. Usually rental income is reported to the Internal Revenue Service on schedule E of your tax returns. The lender will evaluate your schedule E to ensure you meet the two-year requirement. In addition, it will calculate the rental income using these forms. Lenders will not simply use the gross rents as the income, but will consider your deductions as well.

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    Order an operating income statement (Fannie Mae form 216) when the appraisal is ordered. In addition to evaluating the value of the home, the appraiser will evaluate the rental income for the property's neighbourhood. The lender will review this information during the approval process to ensure the rental income is reasonable and sustainable for the neighbourhood. The amount of rent used to offset the mortgage may be reduced depending on the findings of the appraiser.

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    Include copies of the lease agreements to the lender. Many lenders are required to review the lease agreements to ensure the home is truly being leased and is not a land contract, or contract for deed where the renter is really buying the home through an owner-carried mortgage. The lender wants to ensure the lease does not have any provisions that would supersede the first lien position.

Tips and warnings

  • Often rental homes are depreciated for tax purposes. The lenders usually will not reduce your rental income by the depreciation reported. Also, if you had a large one-time expense, such as a remodel or repairs, provide receipts to show what the expense was and why it was a one-time expense. This may allow you to use more rental income to qualify for your loan.
  • Provide accurate tax returns. Most mortgage lenders will require you to sign IRS form 4506-t at application and at closing. The lender uses this document to obtain a copy of your tax returns directly from the IRS. The lender's underwriter will compare the tax returns obtain from the IRS with the tax returns you provided. If they do not match, the loan will most likely be declined.

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