Last but not least (and probably the most used form of rental calculations) part 3 of 3 of “Rental income from non-subject properties”.  Be sure to read parts 1 and 2 to get up to speed on this entire topic.

As a quick recap this three-part blog broken down into these topics in regards to rental income.

  • Rental income from a 2-4 Unit primary residence
  • Rental income from the subject property
  • Rental income from non-subject properties (including when the borrower’s business owns a property)

As I stated above rental income from non- subject properties is the most common rental income calculations that are done.  But for the most part the income falls into two major categories, first rental income reported on schedule E’s and second income NOT reported on schedule E’s.  There are a few exceptions such as properties that are personally financed BUT now inside of a business, but for the most part there are two categories.
As a reminder the examples below are for conforming loan and follow the guidelines published in FNMA and FHLMC guidelines (quoted below).

Guideline Sources/ References
FNMA B3-3.1-08 Rental Income 09/29/2016
FHLMC 5306.1 Rental Income 03/02/16
FHLMC Rental Income Matrix  03/2016

Rental Income from Non-Subject Property

Category One – Rental Income Reported On Schedule E.

When a borrower shows a property in their schedule E regardless if it is a single family home, 2-4-unit property, or commercial property you can use the following rules.

Here is an example from SCH E

Tax form example REO
Add the following lines

From our example above
$15,000 Line 3    Rents Received
$600                       Line 9   Insurance
$1200                    Line 12 Mortgage Interest
$1100                    Line 16 Taxes
$3800                    Line 18 Depreciation
$1,200                   Line 19 “Other”

$22,900 Sub Total

Subtract Line 20

Gross Rental Income
$11,848 Annual / 12 Months = $987.33 per month GROSS rental

Final Income / Loss
$987.33 Gross Rental
Subtract Actual PITIA
$500       P/I
$200       Taxes
$100       HOI
$100       HOA
$87.33   Net Rental Income for example 1


A few notes

Line 14 repairs you can only add back a “one time” or “ non-recurring” expense. For example, if a borrower has a driveway put in, you could add back on that expense.  But if you review the repairs line and see that repair money is spend yearly on general maintenance (regardless of the amount) you cannot add those expenses back in.

Line 19 “other”
Most of the time this line is used to deduct HOA dues, which can be added back in (as long as you remember to deduct them with the full PITIA).  If you see other “one time “expenses on this line you can also add them back in as long as you properly document they are not recurring.

If you can document the property is has not been in service for the full 12 months, you an divide the gross income

Category Two – Rental Income NOT Reported On Schedule E.

If the rental property is not showing on the schedule E , you can use a lease IF the property is not on the schedule E for one of these reasons.

  • Purchased after the last tax year
  • Converted from a primary residence to a rental after last tax year
  • Meets FNMA’s “out of service” requirements (FHLMC has different rules see last bullet point)
  • Rental income reflected on schedule E is only partial year rental income.
  • FHLMC only does allow you to use a lease if the rental income reflected us greater than what is on the schedule E if the subject was under repair or upgrades, this rule comes with a bunch of restrictions see FHLMC Allregs 5306.1


Example 2 Lease provide is $2,000 per month

$1,500  ($2,000 x 75%)
Subtract Actual PITIA
$500       P/I
$200       Taxes
$100       HOI
$100       HOA
$600       Net Rental Income for example 2

Totaling Up The Final Rental Income

Both agencies require that you use the “sum” rental income for either income or debt.  Using the examples above you would determine the net rental income or loss for each property and sum up the total as follows:

$200                       Rental Income Property 1
$300                       Rental Income Property 2
($800)                   Rental Loss Property 3
$100                       Rental Income Property 4

($200)                   “Sum” of rental properties is added to the borrowers DEBTS

Conversely if the example above ended up being a positive $200 we would add $200 to the borrower’s income.

Rental properties owned by the borrowers business BUT they are personally financed.

Some borrowers have property that they have personally financed and then transferred into a business entity such as a 1065 or an 1120S.  When you have a property like this you need to slightly modify the math, please note this modification is for FNMA only, FHLMC still has you do the rental math as I have shown above.

The adjustment you make is as follows, complete the schedule E review in the same way we completed in Example 1.  BUT at the end here is the difference

A) If the result is a positive number you must adjust to a $0 or wash the PITI payment out
B) If the result is a negative number, the full rental loss is counted against the borrowers DTI.

Here is a link of a video blog we published a few months ago that explains this process in more detail.


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