Offset refers to the use of expenses related to the rental property to reduce the borrower’s debt-to-income ratio.
These expenses can include property taxes, insurance, maintenance, and management costs.
By deducting these expenses from the potential rental income, the lender can determine the borrower’s net rental income, which can then be used to calculate their debt-to-income ratio.
Rental Offset Example
Continuing with the example above, the lender may also consider the expenses associated with the rental property to reduce the potential rental income.
Let’s say that the rental property incurs $500 per month in expenses, such as property taxes, insurance, maintenance, and management costs.
In this case, the lender may subtract the $500 in expenses from the $1,500 in potential rental income to arrive at a net rental income of $1,000 per month.
This net rental income can then be used to calculate your debt-to-income ratio.
Debt Coverage Ratio
Debt coverage ratio (DCR) is a measure of a borrower’s ability to make mortgage payments using rental income.
It is calculated by dividing the property’s net operating income (NOI) by the mortgage payment.
A DCR of 1.0 or greater indicates that the property generates enough income to cover the mortgage payment, while a DCR of less than 1.0 indicates that the borrower may have difficulty making mortgage payments.
Conclusions and Further Thoughts
To qualify for a rental property real estate purchase with rental income, borrowers should have a good credit score, sufficient cash reserves, and a stable employment history.
They should also be prepared to provide documentation of their rental income and expenses, as well as their personal financial information. Lenders may also require borrowers to have a certain amount of equity in the rental property, typically around 20% of the purchase price.
In summary, add-back and offset are methods used by lenders to assess a borrower’s eligibility for a rental property real estate purchase with rental income.
Add-back involves adding rental income to a borrower’s gross income, while offset involves deducting expenses related to the rental property to determine the net rental income.
PS – One of my hobbies is blogging about mortgages, debt and government policy. During the day I’m a MORTGAGE BROKER in Kelowna, BC!
Check out the Huber Mortgage Home Buyers Guide HERE