Rental Property Income: New Mortgage Game-Changer?

When applying for a mortgage, lenders consider your credit score, credit history, debt-to-income ratio, and proof of income. Rental income can be included in your proof of income, but it may also increase your debt. Lenders will consider the cash flow income or loss from any rental properties you own, which can either positively or negatively impact your ability to qualify for a mortgage. If your rental property produces positive cash flow, it can improve your debt-to-income ratio and increase your chances of qualifying for a mortgage. On the other hand, if your rental property generates negative cash flow or a net loss, it will be added to your debt, reducing the mortgage amount you can afford and making it more challenging to qualify.

Rental income and debt-to-income ratio

When applying for a mortgage on your primary residence, lenders will consider the cash flow income or loss from any rental properties you own as part of your debt-to-income ratio. The debt-to-income ratio is a financial calculation used to determine how well you manage debt and is a snapshot of your creditworthiness. It is calculated by dividing your monthly debt payments by your gross income before taxes.

Lenders will first determine the rental income for the property, then calculate the cash flow by subtracting the total monthly housing expenses, including the mortgage payment, property tax, homeowners insurance, and homeowners association dues, from the rental income. If the property generates a positive monthly cash flow or net income, this figure is added to your income for your debt-to-income ratio, increasing the mortgage amount you can afford. Conversely, if the property produces a negative monthly cash flow or a net loss, this figure is added to your debt, reducing the mortgage amount you qualify for.

The treatment of rental income may vary depending on whether it is from your primary residence or a separate investment property. If the rental income is from your primary residence, it should be added to your gross monthly income calculation. In the case of income from a separate investment property, it will only count toward your gross monthly income if it exceeds your monthly mortgage payment. Additionally, lenders may have different methods for calculating rental income, and some may require additional documentation to prove your current or predicted rental income.

It is important to note that the debt-to-income ratio is just one factor considered by lenders in the mortgage approval process. Other factors, such as your credit score, credit history, and employment status, also play a significant role in determining your eligibility for a mortgage.

Credit score and history

A solid rent credit history can be a valuable asset when applying for a mortgage. While traditional credit scores are still the most important factor in determining whether you're eligible for a home loan, a history of regular, on-time rent payments can help boost your credit score and build a positive credit history. This is especially important if your credit history is thin or mixed. Lenders view a history of timely rent payments as evidence of your ability to manage regular, significant payments, thereby increasing your chances of mortgage approval.

Rent payments are not typically reported to credit bureaus, and landlords usually don't report accounts in good standing. However, this is changing as more property management companies and landlords begin to report rent payments. When rent payments are reported, they are included in your credit report, and your payment history can affect your credit score positively or negatively. Late payments can damage your credit score, making it harder to get a mortgage, while consistent, on-time payments are crucial for maintaining a positive credit history.

In 2021, Fannie Mae announced a new initiative to include positive rental history information in the underwriting process. This information is gathered through an automated process that analyzes an applicant's bank statements for regular rent payments. This change is specifically designed to help more renters become homeowners by having their good standing as tenants act as part of the puzzle that demonstrates their fitness to borrow.

Additionally, consider enrolling in credit-building programs or services that allow you to report your rent payments to the credit bureaus. These services can help enhance your credit profile by including your rental history. Keeping a record of your rental payments is also important, as not all landlords report payments to credit bureaus, and having documentation can prove your reliability to lenders.

It's worth noting that while a strong rent credit history can be beneficial, it may not always be considered. Not all lenders take rent payment history into account, and rent payments are not always automatically reported to credit bureaus. Evictions may also impact your mortgage application, but this alone is unlikely to cause lenders to reject you. Evictions do not appear on your credit report, but if you were evicted due to non-payment, your landlord may have hired a collection agency, and debts in collection are added to credit reports.

Tax deductions

When it comes to rental properties and their impact on new mortgages, tax deductions are an important consideration. Here's a detailed guide on the various tax deductions you can claim as a rental property owner:

Mortgage Interest

One of the most significant tax deductions for rental property owners is the ability to deduct mortgage interest. This applies to both primary residences and rental properties. For rental properties, you can deduct mortgage interest as a business expense on Schedule E of your tax return. This includes interest on first mortgages, HELOCs, second mortgages, home improvement loans, and fixed-rate loans for rental activities. The Tax Cuts and Jobs Act (TCJA) reduced the maximum mortgage principal eligible for deductible interest to $750,000 ($1 million if the mortgage was obtained before December 16, 2017).

Property Taxes

You can deduct property taxes on your rental property. The total deduction allowed for state and local taxes is limited to $10,000, or $5,000 if you are married and filing separately. This includes real property taxes, which are generally deductible, but it's important to note that taxes charged for local benefits and improvements that directly increase the property's value are not deductible.

Operating and Maintenance Expenses

Rental property owners can deduct various expenses related to operating and maintaining the property. This includes repairs, maintenance, utilities, insurance, and advertising. These expenses are considered ordinary and necessary for managing, conserving, and maintaining the rental property.

Depreciation

Depreciation is another important tax deduction for rental property owners. You can deduct the depreciation of the dwelling, excluding the land it sits on. This reflects the decrease in the value of the property over time due to wear and tear.

Travel Expenses

If you incur travel expenses specifically for rental property repairs or to collect rent, you can deduct these as well. There are two ways to deduct travel expenses: using the actual expenses or the standard mileage rate, which was $0.70 per mile for business use in 2025.

It's important to maintain good records of your rental income and expenses, as this will help you during tax reporting and can protect you in case of an audit. Keep track of receipts, cancelled cheques, bills, and other relevant documentation to support your tax deductions.

Lender requirements

If you are renting out your primary residence, you must notify your lender. Many lenders require you to live in the home for a certain period, often a year, to qualify for loans with lower rates. If you do not, you may be breaking a legal contract and committing occupancy fraud.

Lenders will require proof of income, or if it is a new rental, proof of the earnings potential of the property. They will also look at your net cash flow. Lenders will use 75% of your total rental income before subtracting expenses. If the resulting number is positive, it will be added to your income. If not, it will be counted as a loss, and you will need to make it up from another source.

If you are a first-time homebuyer, your history of paying rent may positively impact your mortgage approval. Lenders will verify that you have made recurring rent payments for the past 12 months by identifying them in your bank statements.

Investment property and primary residence

When applying for a mortgage on a primary residence, lenders will consider any income or loss from rental properties as part of your debt-to-income ratio. This ratio is calculated by dividing your monthly debt payments by your gross income before taxes. A higher debt-to-income ratio reduces your chances of getting approved for a mortgage.

Lenders will first determine the rental income for your investment property. They will then calculate the cash flow for the property by subtracting the total monthly housing expense (including the mortgage payment, property tax, homeowners insurance, and homeowners association dues) from the rental income. If the property generates a positive cash flow or net income, this figure is added to your income for your debt-to-income ratio, increasing your ability to qualify for a mortgage. On the other hand, if the property produces a negative cash flow or net loss, this figure is added to your debt, making it more challenging to qualify for the mortgage.

Lenders may require additional documentation to prove your rental income, such as tax returns, bank statements, and profit and loss statements. They will also consider your credit score, credit history, and proof of income. Your rental history may also impact the lender's decision, especially with new guidelines from Fannie Mae, which consider rental history as part of the underwriting process.

It is important to note that owning a properly financed investment property should not affect your ability to qualify for a new primary residence mortgage. "Properly financed" means having a reasonable mortgage with market interest rates and a loan-to-value ratio of less than 80% of the fair market value. It also requires receiving rental payments equal to or higher than your monthly mortgage payment on the investment property, including real estate taxes and insurance. Lenders may also use a vacancy factor when evaluating your application, which can vary depending on the location and desirability of the property.

Frequently asked questions