“Rental add-back” is the percentage of rental income a borrower receives that the lender is willing to use to qualify him/her for a mortgage.
Rental add-back can range from 50%-100% on conventional mortgages. This percentage of rental income is added to the borrower’s income to determine his/her debt ratio.
Here’s an example of how rental add-back is used to calculate a borrower’s total debt service (TDS) ratio:
___ __________ PITH + Other Debts___ _________Borrower’s Income + ( Rental Addback x Rental Income )
PITH = Principal, interest, property taxes, heat, and 1/2 of condo fees. PITH generally takes into account housing costs from all the borrower’s properties.
Keep in mind, lenders have many different forumulas for calculating debt ratios with rental income, so check your lender’s guidelines.