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Mortgage  Question?
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How is Rental Property Treated When Apply for Mortgage?

How is a rental property treated when you apply for a mortgage? I own a rental property that is break even.

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

If you own a rental property, when you apply for a mortgage, lenders will request the Schedule E from your tax returns for the property for the prior two years to determine if the property generates a profit, loss or is break even. The output of the Schedule E is the income or loss from the investment property according to the tax code and this figure is also reported on Line 17 of your 1040 for your tax return. If the property generates a profit according to the Schedule E, then lenders include the profit as income when calculating your debt-to-income ratio. If the property generates a loss according to the Schedule E, then lenders include the loss as debt when calculating your debt-to-income ratio. If the property is break even, as you referenced in your question, then it should have no impact on your debt-to-income ratio. The Schedule E includes both the rental income generated from the property as well as property expenses including mortgage interest, property tax, insurance, depreciation and other items. So you benefit from the rental income offsetting the property expenses plus the lender adds back any depreciation noted on the Schedule E because it is a non-cash expense. Please note that lenders usually use the average income / loss figure from the Schedule E for the prior two years to calculate your debt-to-income ratio when you apply for a mortgage.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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