How to Calculate DTI With Rental Income for a Mortgage

To calculate DTI with rental income, lenders take 75 percent of the gross monthly rent, subtract the property’s full mortgage payment (and, when working from tax returns, operating expenses), and then either add the resulting net rental income to your qualifying income or, if it’s a loss, add it to your monthly debts. The 25 percent haircut accounts for vacancy and maintenance. The exact inputs depend on whether you already own the property, whether you’ll live in it, and which loan program you’re using.1Fannie Mae. Rental Income

The 75 Percent Rule

Fannie Mae, Freddie Mac, FHA, and VA all start the same way: multiply the gross monthly rent by 75 percent. The other 25 percent is assumed lost to vacancies and upkeep, so it never enters your DTI math. This applies whether the rent figure comes from a signed lease or from an appraiser’s market-rent estimate.1Fannie Mae. Rental Income

For a property without a rental history, the lender orders a Single-Family Comparable Rent Schedule (Fannie Mae Form 1007 for one unit, Form 1025 for two to four units) so an appraiser can supply an independent rent figure.2Fannie Mae. Appraisal Report Forms and Exhibits Freddie Mac uses Form 1000 and Form 72 for the same purpose. You typically pay for the appraisal, and the lender orders it during underwriting.

Net Rental Income: The Basic Formula

Once you have 75 percent of gross rent, subtract the property’s PITIA — principal, interest, taxes, insurance, and any association fees. What’s left is your net rental income, and the sign matters:

  • If it’s positive, add it to your gross monthly income. Your qualifying income goes up, and DTI goes down.
  • If it’s negative, treat the loss as a recurring monthly debt. Your total debts go up, and DTI goes up.3Fannie Mae. Income from Rental Property in DU

Example: Positive Rental Income

You earn $6,000 a month from your job and collect $1,800 in rent on an investment property. Applying the 75 percent factor gives $1,350 of adjusted rent. The PITIA on that property is $1,100. Net rental income is $1,350 − $1,100 = $250. Qualifying income becomes $6,000 + $250 = $6,250. If your total monthly debts (including the new mortgage) run $2,500, back-end DTI is $2,500 ÷ $6,250 = 40 percent.

Example: Rental Loss

Same rent, but the PITIA is $1,500. Net rental is $1,350 − $1,500 = −$150. That $150 loss lands on the debt side. With $2,500 in other debts, total obligations are $2,650. Against a $6,000 salary and no positive rental to add, back-end DTI is $2,650 ÷ $6,000 = 44.2 percent.3Fannie Mae. Income from Rental Property in DU

If You Already Own the Property: Use Schedule E

For a rental you’ve owned long enough to report on taxes, the lender works from IRS Schedule E of your most recent Form 1040.4Fannie Mae. Income or Loss Reported on IRS Form 1040 Schedule E Line 26 shows total rental real estate income or loss, but the underwriter doesn’t use that number as-is. Because Schedule E deducts non-cash items that don’t drain your bank account, Fannie Mae requires the underwriter to add back depreciation, mortgage interest, property taxes, insurance, and HOA dues.1Fannie Mae. Rental Income

Regular operating expenses — maintenance, advertising, management fees, utilities — stay subtracted.4Fannie Mae. Income or Loss Reported on IRS Form 1040 Schedule E Divide the annual result by 12, and that’s your monthly qualifying rental figure. Only properties listed on the Schedule of Real Estate Owned section of the loan application (Form 1003) can contribute rental income to the calculation.5Fannie Mae. Instructions for Completing the Uniform Residential Loan Application

If the Property Has No Rental History: Use the Lease

For a new purchase or a property you’re just starting to rent out, the lender wants a fully executed lease agreement plus the appraiser’s comparable rent schedule. The lower of the two figures — or, in practice, the lease rent — gets multiplied by 75 percent, and the calculation proceeds from there.

Converting a Primary Residence to a Rental

When you buy a new home and plan to rent out the one you’re leaving (the “departing residence”), you’ll need a signed lease and an appraiser’s rent estimate. With at least a year of documented property management experience on any property, there’s no cap on how much of that rental income can count. Without it, the rental income can only offset the departing property’s PITIA — it can’t add anything to your qualifying income.

FHA loans add a second test. You generally must show either that the new home is at least 100 miles from the departing residence, or that you have at least 25 percent equity in the departing home confirmed by appraisal. If neither holds, FHA won’t let you use the rental income at all.

Multi-Unit Owner-Occupied Properties

If you’ll live in one unit of a two-to-four-unit property and rent out the others, the math changes. You can’t count rent from your own unit. And the net-against-PITIA offset used for investment properties doesn’t apply here: the qualifying rental income is added to your income, and the full PITIA on the property is counted as a debt. The two sides don’t get netted.1Fannie Mae. Rental Income

How much rent you can use depends on your track record as a landlord:

  • With at least one year of documented property management experience, no restriction on the amount of rental income counted.
  • Without documented experience, rental income can only offset the property’s PITIA.
  • With no experience at all, no rental income can be used to qualify.1Fannie Mae. Rental Income

Experience is generally documented by 365 fair rental days on Schedule E for any property you’ve owned, or by a signed lease if the property has been owned for at least a year but wasn’t rented for the full year.

What About a Roommate or Boarder?

Rent from a boarder in your primary residence usually can’t be used to qualify. Fannie Mae doesn’t treat it as stable income except in two narrow situations: a borrower with a disability receiving rent from a live-in personal assistant (which can count for up to 30 percent of qualifying gross income), and the HomeReady program’s specific boarder-income provisions.6Fannie Mae. Other Sources of Income Either way, you’ll need 12 months of documented rent payments and proof of shared residency, such as a driver’s license or bank statements showing the same address.

DTI Ceilings by Loan Program

Your final DTI, rental income included, has to fit inside program limits:

  • Conventional loans through Fannie Mae or Freddie Mac allow back-end DTI up to 50 percent via automated underwriting, or 45 percent for manually underwritten loans.7Fannie Mae. Debt-to-Income Ratios
  • FHA loans use 31 percent front-end and 43 percent back-end as standard, with room to 50 percent back-end for borrowers with strong compensating factors like high credit scores or cash reserves.
  • VA loans use a 41 percent back-end guideline, but the residual-income test — how much cash your household has left after debts and basic living expenses — often carries more weight.

Individual lenders can impose tighter overlays. When your DTI sits near a ceiling, whether the rental side of your file lands as a positive addition to income or a negative addition to debts can be the difference between approval and denial. Work from actual leases, filed tax returns, and appraiser-supplied rent estimates so every figure in the calculation is one the underwriter can verify.