Determining Net Rental Income when Qualifying for a Mortgage

EDITORS NOTE – 11/22/2014: Oh the joys of writing a mortgage blog… guidelines change constantly. Information in this post is not current.  Please check out this more recent article on rental income for conforming mortgages here. And if I can help you with your investment (or any) property) in Washington state, please contact me!

Rental income is generally not fully credited when qualifying for a mortgage.  Lenders will “discount” the rent because of the cost and risk associated with owning investment property.  If someone does not have at least two years history as a landlord, they may not be able to use the rental income at all and may have to qualify with the full mortgage payment.

Conventional financing allows a qualified investor to receive credit for 75% of the gross rental income.  From this figure, property taxes, insurance, home owners association dues and any mortgage payments are deducted to create the amount of rent (positive or negative) that the lender will use for qualifying purposes.

For example, a property has a $2,000 total mortgage payment (PITI) with no HOA dues and receives rental income of $2,000 per month.

$2,000 rental income x 0.75% = $1,500.  $1,500 less the mortgage payment of $2,000 creates a net rental income of negative $500 per month.   This would be factored as a debt and not a credit or “breaking even” on the loan application for qualifying.

Of course if there are multiple investors involved, the net rental income is split accordingly.

FHA does not have the same two year history requirement for existing rentals as conventional loans do.  The vacancy factor in the Seattle area is 15% which means that 85% of the rent is allowed to be factored as income.  FHA loans may use future rental income (no 2 year history) when converting an existing home into a rental if the borrower is being relocated or if there is enough equity in the subject property.

To document rental income, be prepared to provide tax returns and signed lease agreements. Lenders will use the net income from your tax returns.

When you have rental properties, be prepared to have additional reserves (savings) required based on how many properties are owned.

If you have questions about qualifying for a mortgage for a home located in Washington State, please contact me.  If you would like a personal rate quote from me for an home located in Washington state, click here.


  1. Hi Brian,
    Sorry about the delay w/publishing your comment…you wouldn’t believe how many spammy comments I receive.

    From the VA Lenders Handbook:

    Analysis: Rental of Other Property Not Securing the VA Loan
    Rental income verified as stable and reliable may be included in effective income. If there is little or no prior rental history on the property, make a determination based on review of:

    • documentation of the applicant’s prior experience managing rental units or other background involving both property maintenance and rental
    • any leases on the property, and
    • the strength of the local rental market.

    Property depreciation claimed as a deduction on the tax returns may be included in effective income.

    2 – I’m double checking.

  2. Ian Forsyth says

    Dumb question, but in your example once you’ve done this calculation to get the net rental income and its negative, is the $2K mortgage payment removed from the total debt sum and replaced with the $500 negative debt? Or is the $500 ADDED to the 2K debt service–which doesn’t seem fair because then none of the rental income is being used to offset the debt service.

  3. I’ve owned a rental property for two years now and was hoping to leverage the rental income of this property after 2 years to qualify for a HELOC to buy another home. It was always my assumption I could use 75% of my gross rental income to qualify for the loan as my current DTI without rental income considered is already over 43%. My gross rental income is around 22K, but my Net rental income after expenses is only 2K on my schedule E. So you are saying here only 2K would be considered on a new loan application? well…. in my situation I couldn’t qualify for much on a HELOC? this doesn’t seem right? am I missing something?

  4. A family member applied for a HELOC on his primary home with about 50% equity. FICO score over 800 and good income. He has two rentals that he has owned for several years. The underwriter looked at his past 2 years schedule E’s which both showed a paper loss and determined that he had losses from his rentals. The properties actually have actual net income, but of course, the schedule E’s also show depreciation which allows for a tax write off. Also, with 75% of rent, he would still show a small income, but that method wasn’t used. The underwriter first wanted him to use the HELOC to pay off his only credit with a balance of a couple thousand. AND his student loan balance AND the mortgage on one of the rentals . Its about $37K and then he would own that one free and clear. After that, he would have no other debt than the mortgages on the primary and 2nd rental. He agreed and then the HELOC was denied the loan stating that the losses would bring his income down too low. The rentals actually hurt him. Is this right?

    • Hi Marg,
      We would not use the schedule E if he was qualifying with paying all of the mortgages.

      Otherwise we take the net rent, add back in taxes, insurance, mortgage interest, HOA dues and depreciation. Take that amount away from the total cost then subtract the PITI and that is your net rent that we would most likely use.

  5. Thank you. I am interested in buying income property, and just saw a duplex that I really liked. The problem is that I was trying to figure out how much of a down payment I needed, and how the income on the 2 units would figure out. Your answer was so clear, and answered more questions that I had not even thought of.

    Thanks again. Irma

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