Financing Question on DTI

11 Replies

Hey guys,

I own my own place in NYC with a hefty mortgage payment and building maintenance/tax fees etc. I have no other debt.

Currently my DTI, if I include the mortgage and the full maintenance monthly fee for my building (which includes my property taxes) is 24%. I can probably squeeze out about $700 more of second/third mortgages before I hit 30%, if I assume my rental income will not be counted at all..

That said, is 30% DTI kosher? Will I be able to find lenders who want to loan to me (out-of-state, btw)? I have excellent credit, etc. etc. The gorilla in the room here is the notion of selling my apartment and unlocking a good chunk of capital to play with without worrying about lender's turning their nose up at my DTI. But right now, I do not want to sell so am trying to understand how much leeway I have.

Short Version: How high of a DTI can I be at until lenders will stop providing me conventional loans for rental properties, assuming an 800 FICO score?

Thanks guys. Just trying to set some realistic early goals for myself and the first step is understanding how much leverage i will have to play around with before I have to consider liquidating the assets I am currently sitting on.

Lenders will go up to 45%.  I've heard numbers as high as 50%.

Once you have two years landlord experience then lenders will include the rental income. For existing properties they look at your tax returns for actual income. For the new loan they look at the estimated rent, multiply by 75% and subtract PITI.

DTI with rentals works differently than other debt. If net rental income is positive, it adds to your income and improves your DTI vs. your baseline DTI (which ignores the rentals completely.) If net rental income is negative, only the negative amount adds to the debt side of the calculation.

Hi Jon,

Thanks a lot for your feedback. I've found differing perspectives on the web from the 45-50% you mention to more conservative estimates such as 36% or even lower.

So do you think the major large bank lenders would be okay going to 40-45% as well, or is it better to try to build relationships with smaller regional banks/CUs once the DTI gets high?

Thanks!

My first rental property went through Wells fargo.

And they went up to 45percent, not any higher.

Originally posted by @Vik C. :

Hey guys,

I own my own place in NYC with a hefty mortgage payment and building maintenance/tax fees etc. I have no other debt.

Currently my DTI, if I include the mortgage and the full maintenance monthly fee for my building (which includes my property taxes) is 24%. I can probably squeeze out about $700 more of second/third mortgages before I hit 30%, if I assume my rental income will not be counted at all..

That said, is 30% DTI kosher? Will I be able to find lenders who want to loan to me (out-of-state, btw)? I have excellent credit, etc. etc. The gorilla in the room here is the notion of selling my apartment and unlocking a good chunk of capital to play with without worrying about lender's turning their nose up at my DTI. But right now, I do not want to sell so am trying to understand how much leeway I have.

Short Version: How high of a DTI can I be at until lenders will stop providing me conventional loans for rental properties, assuming an 800 FICO score?

Thanks guys. Just trying to set some realistic early goals for myself and the first step is understanding how much leverage i will have to play around with before I have to consider liquidating the assets I am currently sitting on.

Hey there Vik,

From a lending point of view I would ask what kind of property is this? I could only use rental income from a conventional/FHA/VA lending point of view if its a legal use (zoning code) 2-4 unit building and your perhaps living in one of the units ? If not the rental income you have is considered "boarder/roommate," income and generally cannot be used (can be used in limited circumstances).

DTI on conventional can go up to 45% generally on primary residence and up to 50% if you have 6-12 months of reserves, good credit score, and a lower loan to value of 80% or less (means you put down 20% or more ideally).

DTI also depends because if you're talking about FHA the best you can get is 46.99%/56.99 back end. Front end is housing ratio only and the backend includes housing and all misc/etc obligations as well.

With VA financing its sky's the limit I've seen an approval on 72% DTI on really good credit, reserves, and etc.

I think this question would be better directed towards a lender as you might get varying degrees of answers based on personal experiences but not the extent of the "system," per say.

First, lets back up and understand how DTI is calculated on rentals. If buying more rentals is hurting your DTI you need to find better rentals. Good rentals HELP your DTI, not hurt it.

Step 1: Ignore the rentals completely - both for debt and income. Add up other income (income) and all other debt payments including any residences (debt). Debt/Income = your DTI.

Step 2: Compute the net rental income. This is from your tax returns for existing properties. Savvy lenders will add back depreciation because that's a non-cash deduction. If you're applying for a new loan the lender will have the appraisal include a rent estimate. For that new one, take 75% of rent and then subtract the new PITI payment to get the estimated net rental income. Now add up the existing and new ones to get a total net rental income.

Step 3: Compute total DTI using the debt and income numbers from step 1 and the net rental income from step 2. If the net rental income is positive, DTI = debt / (income + net rental income). The rentals reduce your DTI. If you have a net loss, DTI = (debt + net rental loss) / income. The rentals are hurting your DTI. Net rental loss is a positive number, by the way, the way I've written these formulas.

So, buying more rentals, once you're past the two years landlording experience time period, should help you DTI, if you're buying cash flow positive rentals. If you're buying cash flow negative rentals, then, yes, each one hurts your DTI. And it truly is hurting your personal financial picture. That may be OK if you have the income to support it.

Yes, IMHO, you need to forget about the big banks and find smaller, local banks.

@Vik C.  I wouldn't suggest selling your NYC property unless you bought in the downturn and can capitalize big in this crazy market.  That, and you want to rent and/or downsize so you can use your cash from the sale...moving laterally in this market is very difficult, as I'm sure you've realized. 

Originally posted by @Jon Holdman :

First, lets back up and understand how DTI is calculated on rentals. If buying more rentals is hurting your DTI you need to find better rentals. Good rentals HELP your DTI, not hurt it.

Step 1: Ignore the rentals completely - both for debt and income. Add up other income (income) and all other debt payments including any residences (debt). Debt/Income = your DTI.

Step 2: Compute the net rental income. This is from your tax returns for existing properties. Savvy lenders will add back depreciation because that's a non-cash deduction. If you're applying for a new loan the lender will have the appraisal include a rent estimate. For that new one, take 75% of rent and then subtract the new PITI payment to get the estimated net rental income. Now add up the existing and new ones to get a total net rental income.

Step 3: Compute total DTI using the debt and income numbers from step 1 and the net rental income from step 2. If the net rental income is positive, DTI = debt / (income + net rental income). The rentals reduce your DTI. If you have a net loss, DTI = (debt + net rental loss) / income. The rentals are hurting your DTI. Net rental loss is a positive number, by the way, the way I've written these formulas.

So, buying more rentals, once you're past the two years landlording experience time period, should help you DTI, if you're buying cash flow positive rentals. If you're buying cash flow negative rentals, then, yes, each one hurts your DTI. And it truly is hurting your personal financial picture. That may be OK if you have the income to support it.

Yes, IMHO, you need to forget about the big banks and find smaller, local banks.

Thats True Jon that buying right "helps," your DTI however I've seen many times where it was the right buy in investor theory however the investors accountant goes to town when filing the returns so the cash flow looks lack luster at best.

So by buying right the investor will actually decrease their DTI ratios (qualify for more) but inadvertently I've seen investors stab themselves in the foot because they do not understand how the cash flow statement is determined from the accounting end so they end up frustrated.

Originally posted by @Brandon Cohen :

@Vik C.  I wouldn't suggest selling your NYC property unless you bought in the downturn and can capitalize big in this crazy market.  That, and you want to rent and/or downsize so you can use your cash from the sale...moving laterally in this market is very difficult, as I'm sure you've realized. 

Brandon do you mean there is room for the market to increase in NY? I dont know about NY however Vik might have a lot of equity that has "opportunity costs," he will have to forfeit if he does not sell so its a balance and each persons scenario may differ.

To sell a property in NY is there any misc transfer/stamp/excise tax on the gross sales price of the real estate or other charge beyond the normal commissions/attorney/escrow/title fees?

@Albert Bui  I was speaking in general terms of the market, which in the last 18 months has been an amazing opportunity for the right sellers...as I agree with you that each person scenario may differ.  I don't doubt that the market can still grow, however lots of sellers are capitalizing on it now while mortgage rates are super low and inventory is even lower.

Aside from the normal charges when selling (commissions/attorney/escrow/title fees as you mentioned) there are some others, major ones being transfer taxes which are: 

New York City Real Property Transfer Tax = 1% of purchase price if $500,000 or less and 1.425% if more than $500,000.

New York State Transfer Tax = .4% of the purchase price

 Some buildings also have what's called a "flip tax" which is a pre-determined percentage of the purchase price that's paid at closing...each building is different in this case.

Originally posted by @Brandon Cohen :

@Vik C. I wouldn't suggest selling your NYC property unless you bought in the downturn and can capitalize big in this crazy market.  That, and you want to rent and/or downsize so you can use your cash from the sale...moving laterally in this market is very difficult, as I'm sure you've realized. 

 Yes, I'd really rather not give up my place. I bought in mid-2012 so there has been some appreciation but nothing crazy. At the end of the day, after the tax-breaks and principal paydown, I am flushing less down the toilet than I was while I was renting so it's not a bad position to be in. And no rent inflation which is also nice in Manhattan.

Sounds like if my rental properties are cash flow positive I should not run into DTI issues down the line. Perhaps once I get to 10 properties I will have issues getting loans for Fannie Mae reasons, but that's not something I have to worry about yet.

Thats True Jon that buying right "helps," your DTI however I've seen many times where it was the right buy in investor theory however the investors accountant goes to town when filing the returns so the cash flow looks lack luster at best.

I just do not get this. This makes it sound like there are choices in how to account for the income and expenses with rentals. There are not. An accountant or investor cannot make up expenses and by doing so make the net rental income look worse than it really is. That's tax evasion. An investor could choose to not put down expenses which would make the income look higher than it really is. But that works to the investors advantage when calculating DTI. And results in the investor paying higher taxes than they should. The actual results from a rental are whatever they are. Choosing to ignore some expenses to make the results look better than they really are doesn't change your bank balance.

The only non-cash item that appears on a tax return is depreciation.  Its foolish not to take that.  Because whether you take it or not, it IS decreasing your basis and increasing your gains when you sell or do a 1031.

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