Author Topic: Debt to income ratio question  (Read 1962 times)

Lan Mandragoran

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Debt to income ratio question
« on: August 01, 2017, 09:45:09 AM »
I have heard DTI is commonly used to decide whether people can get financing or not.  Do people here second that? I see all types of information on the internets.

The reason I ask is because we have higher housing expenses than typical, because we have 2 15 year mortgages (one being a duplex that pulls in a reasonable amount) and would like to add more properties as soon as possible.  I know this might be hamstringing us a little bit considering we have a DTI around 30% (1942$ mortgage a month, aprox 6k of income including 1550 of that being rent). 

We are currently renovating the SFH we bought so that we can rent it for a time while we move into a family members (yes... we are crazy) basement in order to save up for downpayment's + improve our financing outlook. I've heard it takes about a year of rental for that to be applied to your DTI.

Sorry if thats slightly rambling. 

TLDR: How is DTI typically used? Hard limits with some banks? Or does it just come down to what you can negotiate.
« Last Edit: August 01, 2017, 09:49:11 AM by Lan Mandragoran »
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2Birds1Stone

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Re: Debt to income ratio question
« Reply #1 on: August 01, 2017, 09:48:46 AM »
It's usually back of the napkin math to determine if someone has enough income to support their debt payments.

Most banks or financial institutions will allow up to 40% debt to income ratio (gross income), which for many people is MUCH too high.
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Lan Mandragoran

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Re: Debt to income ratio question
« Reply #2 on: August 01, 2017, 09:50:26 AM »
Hmmm cool. That's higher than I expected (for better or worse).
« Last Edit: August 01, 2017, 09:56:37 AM by Lan Mandragoran »
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2Birds1Stone

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Re: Debt to income ratio question
« Reply #3 on: August 01, 2017, 09:55:41 AM »
Exactly. We are at 0% as we rent...but theoretically a bank would let us take our enough debt where the monthly payment was $4,700

I would NEVER feel comfortable buying a $1M house on a $140k household income.....but a bank will gladly lend you the $$.
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Lan Mandragoran

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Re: Debt to income ratio question
« Reply #4 on: August 01, 2017, 10:00:23 AM »
Yikes :S. Yeah that is indeed insane.

I know people who've done that. My parents for example lol, they make a very comfortable living, but still have to work because of that high 6figure house + high 5 figure cars.

Kinda different than buying rental's... but even with that it gets scary when you start to get to where we are (roughly 30%), hence the extreme measures on our parts. Also in our part of the country it makes sense to still buy your house.
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Scortius

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Re: Debt to income ratio question
« Reply #5 on: August 01, 2017, 10:19:08 AM »
I applied to buy a house while carrying a mortgage on an investment quadplex.  I disclosed the rental in my application, but also pointed out that it was revenue positive.  Entities offering mortgages know people carry investment properties. The credit union I ended up going with simply asked to see a current mortgage statement to make sure my numbers added up, which they did, so it really was a non-issue.

Lan Mandragoran

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Re: Debt to income ratio question
« Reply #6 on: August 01, 2017, 12:28:10 PM »
Hmmm yeah I had wondered about that. Because if you think about it when you add rentals its pretty much always going to increase your DTI. Especially considering rent only typically seems to count at a .75 or .9% income (depending on if its a FHA loan or not).


Obviously that only applies if your using significant financing (if your not... why even bother with real estate outside of one-off deals).

 


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Cwadda

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Re: Debt to income ratio question
« Reply #7 on: August 01, 2017, 01:03:40 PM »
I just closed on an FHA loan, it was 46-47% DTI. It's a rental property though, and the numbers definitely work.

I would not buy a single family with that DTI though.

CptJack83

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Re: Debt to income ratio question
« Reply #8 on: August 01, 2017, 03:20:35 PM »
Typically you can go to 55% back end DTI on an FHA.  Conventional was typically 43-45%, whoever Fannie's latest guidelines released last week will now go to 50% back end.

If you have rentals it all depends how long you've had rental property in general and what type of loan you are doing (FHA / Conventional) as to whether and how the rental income is calculated.

Work with a good mortgage banker and they can figure all of this out for you.  Larger banks have a lot more restrictions (or overlays) than smaller banks/correspondent lenders.


tralfamadorian

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Re: Debt to income ratio question
« Reply #9 on: August 01, 2017, 03:43:38 PM »
The reason I ask is because we have higher housing expenses than typical, because we have 2 15 year mortgages (one being a duplex that pulls in a reasonable amount) and would like to add more properties as soon as possible.  I know this might be hamstringing us a little bit considering we have a DTI around 30% (1942$ mortgage a month, aprox 6k of income including 1550 of that being rent). 

This is not how DTI is calculated for rental properties.  Here is actual spreadsheet that fannie mae provides to underwriters:
https://tinyurl.com/y7fvfl8u

For properties owned long enough to show up on your Schedule E, they use those numbers.  For properties owned in too short a time to have hit a tax season yet, they use rent*75% -PITIA.  Either way, the rental income and expenses are distilled together before they are added to either the numerator or denominator of your DTI. 

DTI maximum is going to depend on the type of loan you are considering, your number of mortgages, credit score, LTV and the additional criteria of the lending institution. 

The Fannie DTI matrix:
https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf

Lan Mandragoran

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Re: Debt to income ratio question
« Reply #10 on: August 01, 2017, 07:43:08 PM »
Hmm ok Iíll check it out on my laptop in a few.

Isnít debt to income just that debt to income ratio?

Whatís the official formula?  All the calcs Iíve seen have basically just asked for monthly debt/monthly income = dti

They are the first ones that come up when I google debt to income ratio calculator.

I knew about the %s of rental stuff.

« Last Edit: August 01, 2017, 07:45:11 PM by Lan Mandragoran »
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MommyCake

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Re: Debt to income ratio question
« Reply #11 on: August 02, 2017, 03:47:38 AM »
My lender doesn't include my rentals debt or income in my debt to income ratio when applying for a new loan.  They only use my other income (salary) and other debt (1 business loan) to see if my income will support the new property until it is rehabbed, rented, and cash-flow positive. 

Cwadda

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Re: Debt to income ratio question
« Reply #12 on: August 02, 2017, 11:17:47 AM »
My lender doesn't include my rentals debt or income in my debt to income ratio when applying for a new loan.  They only use my other income (salary) and other debt (1 business loan) to see if my income will support the new property until it is rehabbed, rented, and cash-flow positive.

Why not?

Rental income goes straight on your taxes, Schedule E. If they won't consider rental income, you should talk to another lender.

MommyCake

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Re: Debt to income ratio question
« Reply #13 on: August 03, 2017, 03:36:31 AM »
I'm not sure why not... maybe they figure because it is rather easy to lose that income if tenants stop paying?  Either way, since they don't include the debts either, it doesn't really matter to me.  If I ever get denied for a loan or get a high interest rate I suppose I will shop around.  I found a property I'm interested in so I may know this sooner rather than later....

August26th

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Re: Debt to income ratio question
« Reply #14 on: August 03, 2017, 09:24:40 AM »
MommyCake, unless you are working with a portfolio lender (one that is not selling to Fannie Mae or Freddie Mac, and one who perhaps keeps your loan on their books instead of selling them) I would be VERY surprised if they do not count the income nor the debt from your rentals. Especially the debt part. Could it be that your salary is high enough that they ARE counting the debts against you, but that it doesn't matter? If those debts show up on your credit report, it's impossible to just ignore them from a lending standpoint.

Let us know how it turns out!

clarkfan1979

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Re: Debt to income ratio question
« Reply #15 on: August 04, 2017, 05:30:01 AM »
I have two rentals and different brokers have used different formulas in order for me to qualify. This has been frustrating because they are not 100% transparent on their formula, so it just seems like they pull a number out of their magic hat. I am on a similar path in trying to find the most appropriate way to count my rental income.

My current best guess is that for rentals they don't count the debt the same as a primary house. If you have 2,000 in rent and $1900 in total expenses, you claim $100/month or $1200/year in profit. That should add $1200 of yearly income and help you qualify, but not necessarily count at 95% debt to income.

I called Quicken Loans about 6 months ago and a broker over the phone told me that my debt to income with two cash flowing rentals was over 90%. He told me that in order to qualify for another house I needed to get rid of my debt (sell the income properties). It sounded like it was his first job out of college and didn't know what he was doing.

Some brokers used 75% of my rents and ignored my taxes. Some used the last 2 years of my taxes and some just the last year of taxes.

Keep on searching and good luck.


August26th

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Re: Debt to income ratio question
« Reply #16 on: August 04, 2017, 06:51:03 AM »
If the property is on your Schedule E, then Fannie Mae's Form 1038 should be used. If it is NOT on your Schedule E (for example, you bought a property recently and tax time hasn't come around yet) then we would use the lease agreement and take 75% of the rents to offset the mortgage payment.

And also, in case you didn't know this little gem.... if you are purchasing an investment property, the appraiser can do a "comparable rent schedule" and will tell you what the market rents are for that home. We then take 75% of that amount and can use it to offset the subject property's mortgage payment. If your lender won't do that..... find another lender.

MommyCake

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Re: Debt to income ratio question
« Reply #17 on: August 04, 2017, 07:34:44 AM »
Thanks for the info August.  For Lan's question though (and I'm really curious/interested too) what is the allowable DTI?  Also to be clear, am I understanding correctly that for your DTI calculations you take 100% of rental loan, and 75 % of rental income?

MommyCake

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Re: Debt to income ratio question
« Reply #18 on: August 04, 2017, 07:35:50 AM »
Oh, and also, Lan was asking how soon can a new rental income be used?  My lender says 2 months... How about for you August?

Lan Mandragoran

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Re: Debt to income ratio question
« Reply #19 on: August 04, 2017, 07:50:26 AM »
Lenders seem to all have different rules. I've also heard 1 year of rental history several times before.
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August26th

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Re: Debt to income ratio question
« Reply #20 on: August 04, 2017, 08:53:45 AM »
Thanks for the info August.  For Lan's question though (and I'm really curious/interested too) what is the allowable DTI?  Also to be clear, am I understanding correctly that for your DTI calculations you take 100% of rental loan, and 75 % of rental income?

Allowable DTI isn't really determined by the lender (unless they have what we call "overlays" which are more restrictive.) Rather, it's determined by the AUS (automated underwriting system.) Basically, a computer assesses the risk and says yes or no (that's very over-simplified, but I think you get the point.) So, if you have a super high FICO, plenty of assets in reserve, a low DTI, and a low LTV, then it's quite possible you can go up to 50% DTI with Fannie or Freddie. That's not a guarantee, and is more the exception than the rule. More common is to go up to 45% DTI.

For this: "Also to be clear, am I understanding correctly that for your DTI calculations you take 100% of rental loan, and 75 % of rental income?" It depends. Are you talking about for a purchase of a rental? If so, then we look at what the appraiser says are market rents, take 75% of that, and it can be used to offset the proposed loan payment. So, if market rents are $1000, we'd give you $750 toward offsetting whatever the proposed mortgage payment will be. So if the payment will be $800 per month (PITIA), then you'd have a "net rental income" of -$50. Does that make sense?

If you have a rental that on your Schedule E, then the formula is different. You would simply use the form 1038 for those.

Does that help? Clear as mud? :)

August26th

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Re: Debt to income ratio question
« Reply #21 on: August 04, 2017, 08:54:44 AM »
Oh, and also, Lan was asking how soon can a new rental income be used?  My lender says 2 months... How about for you August?

We use new rental come immediately!

CptJack83

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Re: Debt to income ratio question
« Reply #22 on: August 04, 2017, 07:00:38 PM »
Straight From the horse's mouth. 


« Last Edit: August 04, 2017, 08:30:40 PM by CptJack83 »

Lmoot

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Re: Debt to income ratio question
« Reply #23 on: August 06, 2017, 03:31:36 AM »
Don't many lenders include the new debt in DTI calculations? So if you are working with certain lenders, you would have to add the potential debt to ensure taking on the new debt doesn't push you over the lender's DTI limit.

clarkfan1979

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Re: Debt to income ratio question
« Reply #24 on: August 07, 2017, 10:57:27 AM »
Straight From the horse's mouth.

Thank you for posting the Freddie Mac document. If you have had a property for more than a year, showing on your taxes, it says that you have a choice of using your schedule E on your taxes or 75% of the rent.

For rental #1, I showed $6152 in profit on my 2016 taxes. This is pretty low because I claimed a lot of repairs and travel in 2016. On August 1st, 2017, the rent went up from $1950 to $2200/month. If I take 75% of 2200/month, I get $7980 of profit instead of $6152.

When I asked my last mortgage broker about this he told me that I have to use my 2016 taxes and I can't count my new lease of $2200/month in any form. I think this document clearly explains that he was wrong (middle of page 3).

tralfamadorian

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Re: Debt to income ratio question
« Reply #25 on: August 07, 2017, 12:29:36 PM »
Don't many lenders include the new debt in DTI calculations? So if you are working with certain lenders, you would have to add the potential debt to ensure taking on the new debt doesn't push you over the lender's DTI limit.

That's called the back end DTI.  The front end DTI is before the new debt is added.  Lenders will have different limits around both. 

CptJack83

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Re: Debt to income ratio question
« Reply #26 on: August 07, 2017, 06:36:55 PM »
Straight From the horse's mouth.

Thank you for posting the Freddie Mac document. If you have had a property for more than a year, showing on your taxes, it says that you have a choice of using your schedule E on your taxes or 75% of the rent.

For rental #1, I showed $6152 in profit on my 2016 taxes. This is pretty low because I claimed a lot of repairs and travel in 2016. On August 1st, 2017, the rent went up from $1950 to $2200/month. If I take 75% of 2200/month, I get $7980 of profit instead of $6152.

When I asked my last mortgage broker about this he told me that I have to use my 2016 taxes and I can't count my new lease of $2200/month in any form. I think this document clearly explains that he was wrong (middle of page 3).


Fannie and Freddie issue those guidance to lenders and ultimately the lender has to decide what to do.  Many lenders have their own policy (overlays) or take the more conservative interpretation of this guidance.  Your broker may be wrong, or his company may just insist on using Schedule E regardless.  That being said, there ARE lenders out there who will use 75% so shop around.

In regards to your income though.  Your profit on your Schedule E is not the number that matters.  You get to add back depreciation, mortgage interest, taxes, insurance and 1-time losses.  Then subtract that number for your monthly PITIA.  The bottom line is the number that is included in your ratio's

These are offsets.  So if your bottom line is a positive $6000.  That means you get to add $500/mn to your gross monthly income and disregard the mortgage payment.

If it is -$2,400, you would have a monthly liability of $200 and not your full PITIA.


CptJack83

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Re: Debt to income ratio question
« Reply #27 on: August 07, 2017, 06:51:47 PM »
For example, here are the numbers off my 2016 Return for one of my rentals, and how these numbers would be factored into my DTI should I apply for a new loan.

Schedule E bottom line Profit: $5,768
Depreciation: $1,509
Insurance: $865
Interest: $2496
Taxes: $898
HOA Fees: $0.00
1-time extraordinary expense (as itemized on line 19) $0.00

Total - $11,536
1/12th = $961.33
PITIA - $780

monthly income : +$181.33

So if I were to apply for a loan.  The $780/mn mortgage payment (which includes taxes and insurance) would not be considered in my DTI and $181.33 would be added to my gross monthly income.

August26th

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Re: Debt to income ratio question
« Reply #28 on: August 08, 2017, 02:44:26 PM »
For example, here are the numbers off my 2016 Return for one of my rentals, and how these numbers would be factored into my DTI should I apply for a new loan.

Schedule E bottom line Profit: $5,768
Depreciation: $1,509
Insurance: $865
Interest: $2496
Taxes: $898
HOA Fees: $0.00
1-time extraordinary expense (as itemized on line 19) $0.00

Total - $11,536
1/12th = $961.33
PITIA - $780

monthly income : +$181.33

So if I were to apply for a loan.  The $780/mn mortgage payment (which includes taxes and insurance) would not be considered in my DTI and $181.33 would be added to my gross monthly income.

Spot on! This is how most lenders would (or at least SHOULD) calculate the income.

Kayad

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Re: Debt to income ratio question
« Reply #29 on: August 14, 2017, 12:38:27 AM »
Look around for mortgage lender recs on bigger pockets forum.  It turns on underwriting criteria, so how it is calculated depends on whether that shop sells to Fannie, Freddie, Ginnie, or keeps it. 

Another oddity: if only one person of a married couple is on the deed/mortgage, that debt will only count against their dti.  So that is another way to jigger things a bit.