Posted by Dave T on January 26, 2002 at 11:07:35:
It is my experience that lenders usually allow only 75% of rent as income but 100% of mortgage debt service is credited to your liability.
I think a more complete picture of the 25% reserve involves more than just “vacancy”. The lender reserves 25% of your rental income for both rent interruptions and for cash flow reductions. The rent interruption is (of course) an unexepected vacancy.
Cash flow reductions are the cost of minor repairs and maintenance (normal wear and tear), as well as, the unexpected/unscheduled major expense (new water heater, HVAC repair, roof repair, etc.) These items in addition to the normal increases in your annual property taxes and insurance premium all reduce your cash flow.
I believe this is a more complete picture of why the lender credits only 75% of your gross rent as income.