Is my debt to income ratio 48% or 43.7%?

[clarkfan1979]

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. 

[index]

Your math is wrong.

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) ($1975 x 75% - $953 = $528) and ($1675 x 75% - $670 = $586).   

Total Income = $5435 + $766 + $754 = $6955 $5435 + $528 + $586 = $6549

My debt:

Student Loan Payment = $240
Possible Mortgage = $2800

Total Debt = $3040

Total Debt to Income Ratio = $3040/$6955 = 43.71% $3040/$6549 = 46.4%

That 46.4% is $100 in debt payment off from being 48%. Do you have any money on credit cards? Even if you pay them off every month, this counts toward your total debt load.

The good news is you could make it work if you made a larger down payment. You are putting 5% down right now. If you put down another 25k, your P&I would be reduced by $110/month and PMI would be reduced by ~$100 as well. If you look at it as an investment, putting an additional 25k down saves you $2500 a year, a 10% rate of return. I would also put you at a 43% debt load and allow you to qualify for the loan.

[hoping2retire35]

good catch index.

Look at your credit report. It should say what your total debt obligations are. the bank will use that plus whatever you provide (insurance quote for example).

[fishnfool]

Have you considered selling one of your rentals to make this deal work?

If you could put 20 to 25% down and avoid PMI mo betta!

Aloha

[clarkfan1979]

Thanks for the help.

 If I tried to come up with more cash, I would probably do that with a re-fi on one of the rental houses. I could re-fi from 4.75% to 4%. I could pull out 110K on one of the rental houses and put 20% down on the Hawaii house. My mortgage would go up by $400/month on the rental house. However, my mortgage payment would go down by $650 with 20% down on the Hawaii house because I wouldn't be subject to $314/month in PMI. I will let you know what happens.

[fishnfool]

Thanks for the help.

 If I tried to come up with more cash, I would probably do that with a re-fi on one of the rental houses. I could re-fi from 4.75% to 4%. I could pull out 110K on one of the rental houses and put 20% down on the Hawaii house. My mortgage would go up by $400/month on the rental house. However, my mortgage payment would go down by $650 with 20% down on the Hawaii house because I wouldn't be subject to $314/month in PMI. I will let you know what happens.

That makes more sense!

[SwordGuy]

That's way more debt to income than I can conceive of EVER taking on.

I'm assuming you don't have reserves to handle unforeseen issues like major systems breaking down, or the loss of a job?

What happens if a couple of big things go wrong in a 3 month period?  Can you handle them?

[clarkfan1979]

The current debt to income does not count my wife's salary of $15,000-$20,000 for part-time work. She is currently unemployed. It also doesn't count the $2000/month rental income we would get from renting out the main house. The total mortgage would be $2,150, so we would be responsible for $150/month + utilities.

[hoping2retire35]

SG, that is because he is leveraging in order to grow his stache. The more leverage the faster growth.

[SwordGuy]

Fully understand the strategy.   It can work great.

Until it doesn't.   

If there aren't reserves to handle costs for a few big broken items and a few empty units, it's also easy for the entire leveraged edifice to come tumbling down.

[clarkfan1979]

Debt to income ratio and leverage are two different things.

MMM has complained about his problems when he tried to get a loan for a 250K house. He owned a 450K rental with no mortgage and had 600K in stock and had problems getting a loan because his income wasn't high enough.

I currently have 64% equity across 2 rentals. If I bought the 3rd property, my equity would be 36% across the 3 properties. I wouldn't consider 36% equity to be high leverage. However, maybe others would.