A borrower reports an income of $40,000 from rental properties. How much of that should be considered for a mortgage loan application?

When evaluating income from rental properties for a mortgage loan application, lenders typically apply a standard approach to assess the realistic and usable portion of that rental income. Although the borrower reports an income of $40,000 from rental properties, lenders usually consider only a percentage of that income after accounting for potential vacancies, maintenance costs, and other expenses associated with property management.

It is common practice for lenders to use a conservative calculation that reduces the reported gross rental income by a certain percentage, often around 25-30%, to provide a more accurate picture of the income that can be reliably expected. By applying this calculation, they arrive at the figure considered for the loan application. In this case, selecting $30,000 represents a calculated consideration after such adjustments are made.

By emphasizing a lower figure than the gross income, lenders aim to mitigate risk and ensure that borrowers have the means to comfortably meet their mortgage obligations, even taking into account the potential for unexpected costs associated with rental properties.