Why does a mortgage lender ask for a depreciation schedule?

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

Mortgage lenders ask for a depreciation schedule for an investment property because depreciation is a “non-cash” charge. Lenders add back depreciation as well as other items to net income to determine the cash flow attributable to the property. The higher the cash flow for the property, the higher the mortgage amount you qualify for.

To determine the cash flow for an investment property, lenders use the Schedule E in your tax returns which shows the net income or loss for the property. The Schedule E also includes depreciation which the lender adds back to the net income or loss, along with other items, to calculate the cash flow or loss for the property.

For example, if net income for the property according to the Schedule E is $20,000 and you have $5,000 in depreciation expense and other items, the gross cash flow for the property is $25,000. The lender then subtracts the total monthly housing expense for the property -- mortgage payment, property tax, homeowner insurance and homeowners association (HOA) fees, if applicable -- to determine the net cash flow for the property.

If the property produces positive net cash flow according to the lender’s calculation, the profit figure is counted as income in your debt-to-income ratio, which increases the mortgage you qualify for. If the property is cash flow negative, the loss figure is included as debt in your debt-to-income ratio, which decreases the loan you can afford.

Although depreciation is itemized on the Schedule E for the property, in many cases lenders request a more detailed depreciation schedule to confirm the figure. They need to make sure that their property cash flow calculation is accurate and that the amount of depreciation for a specific year is consistent with prior years.

If you want to understand why a lender requests a depreciation schedule it is certainly within reason to ask for an explanation. In most cases, however, providing the schedule benefits you by enabling you to qualify for a higher mortgage amount.

Please note that while the above discussion focuses on deprecation for an investment property, the same general guideline applies to depreciation for other long lived assets such as a business.  So if you own a business that incurs significant depreciation, you may be able to add the depreciation back to the income from the business when you apply for a mortgage. 

The table below shows mortgage terms for leading lenders in your area. We recommend that you contact multiple lenders to confirm their qualification guidelines. Shopping lenders is also the best way to save money on your mortgage.

Sources

"B3-3.1-08, Rental Income."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, February 5 2020.  Web.