Loan Officer Practice Exam

When evaluating rental income not reported on current tax returns, what portion of gross rental income can a lender typically use?

1. 50%

2. 100%

3. 25%

4. 75%

The correct answer is: 75%

In the context of evaluating rental income not reported on current tax returns, lenders typically adopt a conservative approach to ensure that the income used for qualifying borrowers is reliable and accurately reflects their financial situation. Generally, lenders will use a percentage of the gross rental income, taking into account factors like vacancy rates and operating expenses. The use of 75% is rooted in the understanding that it allows for an acknowledgment of potential vacancies and property management costs. By using 75% of the gross rental income, lenders can create a more accurate picture of the borrower's potential cash flow from rental properties, while still being conservative in their assessment. This figure provides a balance between potential income and the risks associated with property rentals, such as periods without tenants or maintenance costs. Other percentages like 50% or 25% would be overly conservative and may not reflect the actual potential income available to the borrower, while using 100% would not provide a protective buffer against unforeseen costs and risks. Thus, 75% is the most practical and commonly accepted percentage utilized by lenders in these situations.