I looked at a house last week that I really liked. I called a mortgage broker that my realtor recommended. Overall, they were very negative on the phone and calculated a different debt to income ratio for me than I calculated myself. I calculate 43.71%, but they calculated 48%. The cut-off is 45%, so according to their math, I don't qualify. Is my math incorrect? Should I get a second opinion?
Income:
My day job pays 5435/month
Rental #1: Mortgage/Taxes/Insurance = $953 and rent is $1975. Difference is $1022/month
Rental #2: Mortgage/Taxes/Insurance = $670 and rent is $1675. Difference is $1005/month
The mortgage broker claims that only 75% of rental income counts because of vacancy. I have heard this before from other lenders and it makes sense to me. So I have ($1022 x 75% = $766) and ($1005 x 75% =$754)
Total Income = $5435 + $766 + $754 = $6955
My debt:
Student Loan Payment = $240
Possible Mortgage = $2800
Total Debt = $3040
Total Debt to Income Ratio = $3040/$6955 = 43.71%
Any ideas on how they got 48%? They also asked about our current rent which is $1,100/month. Why is that relevant?
If anyone is freaking out about the mortgage total ($2800), the house is a 3 bed 1 bath with an attached ADU that is 2 bed/1 bath. Like many properties on Kauai, the ADU is unpermitted, so you can't count the rental income for lending. However, the county is currently very encouraging in getting ADU's permitted because the island currently needs affordable housing. The asking price is $509,000. The asking price is about $30-50K under market value because there was a death on the property. Secondly, once the ADU is permitted it should add another 50K of value. Modest rents would be $2000/month for the 3 bed/1 bath and $1500/month for the 2 bed/1 bath. Our plan was to live in the 2 bed/1 bath and rent out the 3 bed/1 bath. Our payment would be $800/month + $250 in utilities. The house is walking distance to work and in a very good rental area. The mortgage lender told me the total would be $2800/month and her numbers are below.
Principle & Interest = $2239 ($483,550 at 3.75%)
Taxes = $133
Insurance = $114
PMI = $314
Total = $2800.
My wife made 15K this year as a personal assistant. She will make 15K next year substitute teaching. However, she currently doesn't have a pay stub because she quit the personal assistant job to take a certification class for substitute teaching. Her last paystub was August 10th. She won't be able to teach until first week of January. Most likely her first paystub comes Feb 1st. Once her first paycheck comes, this is no longer an issue.
We currently have around 360K of equity across the two rentals.