general financing question

7 Replies

How will my first real estate investment loan affect my credit score and my ability to receive more investment loans in the future. Does a FICO score even factor into real estate investments?

@Noah N.

I'm not sure how it will affect your score.  If you go to a bank or mortgage company... they look at credit, debt to gross income ratio, down payment if applicable, and condition of property plays a part as well.  Your financing will also differ depending on whether or not you intend to occupy the property yourself, or if it's strictly investment.  My bank in the past likes to see a monthly debt to gross income ratio of 44% max, and they want to see a credit score at least in the 720's.  The loan that you're trying to get now will play a part in future loans because it's a debt that's going to be on your credit when you apply for new mortgages in the future.  Hope this helps.

Adam

Thanks Adam Drummond,

very helpful, this might be a stupid question. how do i calculate my debt to gross income ratio? do I factor student loans/car loan into that ratio? or is this strictly related to investment loans only?

Hi Noah,

Your DTI is calculated by adding up all your debt for the year (every car payment, mortgage, student loan, etc) and dividing it by your gross income for the year. I was told banks wanted to see 43% or less- meaning 43% of your gross income is paying for debts INCLUDING the new mortgage you are obtaining. Hope that makes sense.

The cool thing about investment property is that at some point (immediately or in 2 years) the banks will count the income from that property instead of seeing it as a debt.  So instead of the mortgage payments being on the top of the equation, they will put the income from the property in the income (bottom) of the equation and it helps you qualify to borrow more money.  

One banker told me they would take my gross rents, multiply by 75%, subtract the mortgage, taxes, and insurance (PITI) and count that as income. Other lenders may analyze your business a little more closely.

Kelly

@Noah Noysser

@Kelly N.    Noah,  I agree with everything that Kelly said above, that has been my experience as well.

The lender looks at your debts including:  student loans that you're paying on, credit cards, car payments, any type of loan that shows up on your credit.  They do not look at utility bills, health insurance, etc.

For example:

Your Gross monthly income is $1,000.  That means that your total monthly payments that you currently have (loan payments), and the loan that you are applying for. can not exceed 43% or 430 per month.   

Adam

Thanks Mark and Kelly,

I found both of your answers extremely helpful, I'm beginning to see clear picture of this aspect of financing.

My broker lets me go up to 49% DTI. Purchasing 1 house shouldn't affect credit too much, however I have bought 3 in past year and took out a heloc and I have seen my score drop about 30 points just because of "amount of new loans". Fortunately mine was high enough at start it doesn't really matter but if you were at 725 dropping 30 points would definitely hurt your ability for more bank loans or the interest rate associated.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.