Debt to Income and Rental

I currently have a mortgage in my name and my debt to income ratio is maxed. I was thinking about trying to pick up a piece of land, but I would be way over my ratio.

Is it possible to show that my house is rented out and I live with a roommate or something? Would this lower my debt to income ratio? Is this something I could do?

Hi jrock,

Triple net lease the property and the lender will not ding your debt-to-income ratio. Reason: you have no exposure to maintenance and repairs, and a triple net lease eliminates your vacancy exposure in the lender’s eyes.

Da Wiz

Da Wiz,

Thanks for you reply. What do you mean by “triple net lease” ?

A Triple net lease is one in which the lessee takes full responsibility for mtg payments, property taxes, and maintenance and repairs leaving you free from those obligations. They are traditional in commercial leasing and finding much popularity when properly used among small investors in the residential market.

Da Wiz

Wizard’s advice isn’t entirely accurate. The lender will still count your own mortgage debt against you even if it’s on a lease. The reason is that Fannie, Freddie and HUD all disallow omitting your principle residence debt (unless it’s part of a multi-unit property in which case the other units you do not occupy can be used to offset debt as rental income with proper documentation).

This refers to conforming loans only, as non-conforming lenders make up their rules based on their investor requirements which differ greatly.

Thanks for your reply DFWHoldings. How can I go about not having my current mortgage debt count against me? Let’s say I move out and rent it out to someone, and now I live with my Dad and pay him $400 a month rent. Would that work?


To clarify, of course your personal residence counts against your debt-to-income ratio, but the other properties I own where I am on the loan (I try to make that as few as possible) do not because they are in triple net leases.

Da Wiz

Provided it’s not your primary residence and you have a valid, fully executed lease for 12+ months you can use the rental income to offset the debt. The $400 you pay your current landlord will count against you if you will continue to use that residence as your primary residence.

Again, not entirely correct.

The Net-Net-Net lease does not affect your ratios any differently than a regular lease because the vacancy factor is determined by the geographic region OR by the standard 25% factor (absent of a geographic region factor). This is set forth by Fannie, Freddie and HUD guidelines.

In addition to that, the nature of the lease is irrelavant if the property in question was acquired prior to the most recent tax filing period. If that is the case the most recent year’s 1040 Schedule E is used to determine actual income from a property (non-cash expenses are added back to the AGI).

Of course on SISA loans this doesn’t matter (nor would having a Net-Net-Net lease be relavant either).

For conforming loans there isn’t a ‘trick’ to how you structure it. The bottom line is you can use the taxable income you make on your business activities to qualify and you can add back non-cash expenses (and some other expenses that are irrelavant to lease types) but that’s it.

I won’t challenge your information on the legal ramifications of Trusts and how they affect equitable ownership or DOSC concerns, but your information regarding how debts are counted to qualify for is not entirely accurate.


There is a standard letter that my Trustee sends out that has worked 100% of the time over many years, and my and other investors’ debt-to-income ratio is not affected. I’d be happy to furnish you with a copy if you like.

Wow! Post #1000!

Da Wiz

Well again, I can only speak for the underwriting of conforming loans, but nothing your trustee can provide has any bearing on Fannie or Freddie or HUD guidelines. Those guidelines are quite clear that your 1040 schedule E is what is required to determine your rental income. You can tell me all day that it’s worked in the past or this or that, but I know what the guidelines are and I am saying that ONLY the 1040 Schedule E meets that requirement for properties acquired prior to the current tax year.

Are there lenders that offer non-coforming products, sure. Are there lenders that don’t abide by the guidelines set forth on conforming loans, sure. Just as there are lenders that enforce the DOSC and those that don’t. You are very quick to start discussing what they are allowed to do but yet quick to point out in this instance that it’s worked in the past for you. I’m taking the same stance. What could happen or could work is different from the rule.


I don’t know everything about everything and can certainly learn from someone like you as knowledgeable as you are in your field. I must be missing something because this letter has been used by my Trustee for many years and he tells me it has never failed to bring the intended results. I will send it to you for your review and comments. Thanks.

Da Wiz

Ok, well I’ll quote from the ‘Mortgage Credit Analysis Handbook’ (also referred to lenders as the 4155).

In section 2-7.M (analyzing effective income from rental properties) the following is a direct quote:

"The following is required to verify all rental income
1.Schedule E of IRS 1040 — Depreciation may be added back into the net income or loss shown on Schedule E. If a property was acquired since the last income filing date and is not shown on Schedule E a current lease agreement must be provided.

  1. Current leases —The gross rental income must be reduced by 25% (or a percentage by the jurisdictional HOC), before subtracting PITI, HOA dues, etc, and applying the remainder of income (or recurring debts if negative)."

I can neither confirm nor deny whether your trustee has used a letter in the past or not. What I can confirm is that the letter from a trustee DOES NOT meet conforming guidelines for documentation. The bottom line is if the property was acquired before January 1 of the current year, the schedule E must be obtained (again, this is not for programs using SISA or LP Accept Plus documentation, but in those cases, NO documentation is required so a letter from a trustee wouldn’t help either).

Thanks, DFW. I think you just clarified it for me. The reason this letter is successful is that it indicates that under the terms of the occupancy agreement, the party on the application is NOT the party responsible for the lease payments. That responsibility lies 100% with his co-beneficiary. Here’s a portion:

“After the formation of the subject trust, the occupants of the subject trust property under a Triple Net Residential Occupancy Agreement, were assigned a co-beneficiary interest in the trust by your applicant. A bona fide Beneficiary Agreement and separate long term Occupancy Agreement (Net, Net, Net Lease) with the trust itself do contractually bind the Resident Beneficiary to making 100% of all payments, and handling 100% of all costs of ownership. That is, the resident beneficiary shall be contracted to pay all principal, interest, tax and insurance, as well as all costs of maintenance and repairs.”

“Your borrower/s, although still holding the primary obligation for the underlying mortgage financing is, by virtue of the contract with the co-beneficiary/ies, free from all negative-cash-flow, maintenance, repair-costs, property tax, vacancies, upkeep and management expenses relative to the property.”

“Note too, that the Power of Direction within the NEHTrust®™ is with the Settlor Beneficiary (your applicant), requiring that the trustee respond exclusively to its express (and certified) direction. Moreover, in that the beneficiary interest held by the parties is Personalty (not Realty), the property in trust is protected from the potential of either beneficiary’s income tax liens or creditor liens. This is also true of actions in litigation, bankruptcy, insolvency or marital dispute (i.e., due to the inability of a creditor’s being able to partition Personalty when owners are unrelated)”.

Thanks for your help.

Da Wiz

If the mortgage payment is in the your name, and you not a co-obligee for a family member (i.e. it is investment property) then the schedule E must be submitted. If the mortgage is not in your name then the debt would not be counted against you.

Putting a property in a trust will protect you from litigation, but lenders (again, conforming only, I can’t speak for the others) will not lend without counting the ACTUAL DECLARED rental income from your tax returns.

This begs another question, if you can’t supply the schedule E income to offset the debt then you are you defrauding the IRS by not declaring your actual rents received and/or overstating your actual expenses for the property?