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Qualifying for a Rental Property with Rental Income

Are you considering buying rental property in the near future? Unless you can pay for it in cash, you’ll need to take out a mortgage.

Getting a mortgage for your rental property is a lot like getting a mortgage for your principal residence, but there are some differences to be aware of. This article will examine the three ways lenders let you include rental income when purchasing a rental property.

rental income

1. Rental Addback

Using the rental addback way, rental income is added to your income on file used towards debt. Mortgage lenders typically let you use 50 percent of the rental income, but some lenders let you use more, especially on the alternative side. Out of the three ways we’ll be reviewing, this is the least beneficial way for adding extra rental income on file.

Rental Addback Formula:
PITH / [borrower’s income + (rental add-back percentage x rental income)]
P = Principal
I = Interest
T = Property Taxes
H = Heat

2. Rental Offset

Instead of the rental income being added to your own income, using the rental offset way, rental income used to “offset” the principal, interest, taxes and heat (or PITH for short) of the rental property.

If you have a rental surplus, it can usually be added to your own income. If you have a rental deficit, it usually is added as a liability, similar to other debts.

Lenders typically let you use between 50 and 80 percent of rental income using the rental offset formula. Some lenders may let you use more on the alternative side.

Rental offset is more impactful and beneficial than rental addback because of the way it’s calculated.


Rental Offset Formula:

[PITH – (rental offset x rental income)] / borrower’s income

3. Debt Coverage Ratio

The third way lenders let you include rental income is the debt coverage ratio. This way looks at the ratio of cash you need to services the expenses of your rental property. Most lenders are usually looking for a debt coverage ratio of 1.1 or greater, although again, alternative lenders may be more lenient.

Lenders that use debt coverage ratios almost always have rental worksheets to complete. Don’t worry; you don’t need to complete these worksheets yourself. Our mortgage experts will handle that for you.

Worksheets typically include all the rental properties that you own. You’ll usually have to include the rental income, property taxes and other details.

Once the rental worksheet is complete, your debt coverage ratio is calculated.


Debt Coverage Ratio Formula:

Net Operating Income / Debt Service

The Bottom Line

Need help making sense of the different ways to calculate rental income? Don’t worry; we’re here to help. Reach out to us today and our mortgage experts will be happy to walk you through them and choose a lender with the method that benefits you most.

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