How do you calculate rental income?

How do you calculate rental income?

• A. Total Rental Income x 75% - Monthly Mortgage Payment
• B. 75% of Rental Income minus Monthly Mortgage Payment
• C. Total Rental Income minus 50% - Monthly Mortgage Payment
• D. 100% of Rental Income minus Monthly Mortgage Payment

Answer: (A)

When rental income is used to qualify for a loan, lenders don’t take the full rents. They apply a vacancy/expense allowance and then subtract the debt service on the rental property. The standard approach is to take 75% of the gross rental income and subtract the monthly mortgage payment for that property. This gives the net rental income that can be added to the borrower's qualifying income. The 75% factor accounts for vacancies, maintenance, and other property costs, while the mortgage payment represents the debt service that reduces cash flow. Using 100% of rental income would overstate cash flow, and using a much smaller percentage would unduly understate it. So the correct method is to apply 75% to gross rents and then deduct the monthly mortgage payment.

When rental income is used to qualify for a loan, lenders don’t take the full rents. They apply a vacancy/expense allowance and then subtract the debt service on the rental property. The standard approach is to take 75% of the gross rental income and subtract the monthly mortgage payment for that property. This gives the net rental income that can be added to the borrower's qualifying income.

The 75% factor accounts for vacancies, maintenance, and other property costs, while the mortgage payment represents the debt service that reduces cash flow. Using 100% of rental income would overstate cash flow, and using a much smaller percentage would unduly understate it. So the correct method is to apply 75% to gross rents and then deduct the monthly mortgage payment.