Short Term Rental Income and Your Debt to Income Ratio (DTI)
When we first got started buying vacation rentals, most lenders we spoke to did not consider any income we generated from our homes towards our debt to income ration (DTI) because they were short term rentals (STR) and did not have a 12-month written lease in place (LTR). If you have a high DTI because they’re not counting your income, you are not able to get future loans. Lately, I’ve been chatting with lenders to get a lay of the new land.
From talking to our broker, lenders will now consider short term rental income as income that can offset your debt under the following circumstances.
If you’re getting or refinancing a conventional mortgage, but not a jumbo mortgage.
If the income shows up on the Schedule E of your tax returns for one or maybe two years. For a long term rental, they will consider the income right away if there is a lease or 75% of the appraiser’s estimate.
How do lenders treat the short term rental income towards your DTI? They take the income (or loss) from your Schedule E and add back in depreciation, mortgage interest, property taxes and insurance. That number is the adjust income for the property. This number is than subtracted from the full mortgage payment to see how much debt will be considered as they calculate the DTI.
So, does that wipe the debt out completely. Our lender tells us in practice that might not happen if you have a big loss b/c of all sorts of losses that they cannot add back in to get your adjusted income. For example, say you bought new furniture, did some repairs etc. Those big losses would give you a negative income and adding backing a few more items might not get you out of the hole.