Overcoming DTI

28 Replies

My husband and I are forming our plan for rental property investing. We have the 25% downpayment for the first Single family residence that would allow a mortgage note of $1,050 per month and rent for $1750 and have a cash flow best case $700 per month assuming no vacancy/repair ect. We have great credit and our only debt is our personal mortgage of $1850. The lender told me that getting the first investment property is easy but the second is very hard because he will calculate our new Debt as both mortgages (even though I have a tenant paying one) and he will only add the positive cash flow of $700 per month to our income column pushing us over the 45% DTI range when we want a second rental. How do people acquire multiple single family homes? Our plan follows Brandon Turner's book steps for saving for the next 25% downpayment and so on but apparently having your down payments isn't enough? We make a base salary of about $80k (with overtime $110k) If relevant we do have $150k in 401k, $100k in equity in personal home, and $10k in savings. Am I missing something? Thanks!

I have been thinking about the same issue. I like the BRRR strategy Brandon Turner talks about a lot, but finding the financing seems to be the difficult part for my wife and I after the first couple deals. You have an extra asset, though, that could make the task easier.

I'm not recommending this, merely pointing out that it is an option: You could possibly set up a home equity line of credit, and combine that with borrowing from your 401k for a few months. With those you should be able to buy and rehab a modest rental all cash, then rent it out and refinance the property up to 80% LTV to pay back your HELOC and 401k. (refinancing is much easier than getting a new mortgage) That way you essentially only paid the 20% down payment and a couple months of interest on the rest. Lower than the cost of hard money, but you should make absolutely sure you have the means to get the new place refinances and a tenant before starting.

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@Daniel Dow and @Katherine Madison , I also have been thinking about this a lot the past little while, which is why I'm reading older posts about it.

I will just add my recent experience. My wife and I are refinancing our primary residence, not for any investment purpose, but to lower our payment by about $100/month. Mind you, we are refinancing with the same lender who is holding our original mortgage and we've been paying for over three years, and they are still giving us DTI hoops to jump through...

Lending guidelines seem to change often. I had been told that after two years the lenders would count your rental income to offset the debt. The difficulty seems to be getting to that two year mark. That is if the two year rule still stands. 

It seems that pulling equity from your house wouldn't help because it would still hurt your dti. I hope someone with more information can chime in to help you. I can say that for me, after that first two years, I haven't had trouble getting financing.  

Don't give up! There is a way to make it work, just get as much information as you can. Seems like you have your finances in order. I think you'll find a way to get over this little obstacle. 

Good luck!

Hi @Katherine Madison ,

That math is wrong, as you described it. If an investment property is cashflow positive the way we do our math, we can add that positive net number as income, and otherwise exclude the PITI of that property entirely. As you described it, that's the math for owner occupied 2-4 unit properties (note: Fannie Mae does not acknowledge the existence of "owner occupied investment properties" that everyone talks about. It's one or the other. You live there or you don't). Fannie Mae has several different ways of calculating rental income, and getting it wrong is very common even for seasoned LOs.

Take a look at the image below, from an .xls file found here at fanniemae.com.

That individual lender might have an overlay preventing this. Relevant link: How Lender Overlays Prevent Deals. Or that individual lender could be dumb. A lot of real estate professionals are dumb. No link to support that, just take my word for it.

Hi @Will Pritchett ,

No two year wait required, hasn't been that way for a while. That is also an overlay that many, but not all, lenders have. Keep calling until you find a minimal/no overlays lender. Check out the above where it says "property was acquired subsequent to the most recent tax filing" -- obviously that wouldn't be there if the rental income couldn't be used for two full tax years, right?

@Chris Mason I'm so grateful you took the time to post such helpful infomation. As a newbie, it really opened my eyes. The local small lender we spoke to told us positive rental income would not do away with PITI 😳 I'm shocked at how bad his advice was. We plan to rent the property for $1750, our PITI total is $1,050, 25% for vac/repairs is $437.50 making our positive income of $262.50 (which should do away with PITI) completetly changing our DTI (if I understood the chart correctly) Thanks again for the push in the right direction

@Katherine Madison . We hear the same concern from a number of people. There is no reason why the income from your property is not used to qualify a borrower for an investment property loan. If you are unable to qualify for a conventional loan, you should explore potential rental investor loans with specialty lenders. 

There are lenders out there that will look at the actual income from the property to qualify you for a loan and not your personal income. Down payments on average are ~30% of the property value. Keep in mind the Debt Service Coverage Ratio for each of the properties will be 1.25x. 

Good Luck with your future endeavors. 

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@Katherine Madison sounds like you are in a similar situation to us. We are trying to get preapproved for a second mortgage for another investment property we would like to owner occupy.

My Wife and I are on the deed for our current 4 family home, which we bought last year. The one bank we called so far, doesn't want to include our $50k in gross rents as income, since it hasn't been shown on the past two years tax returns. And now my Wife is a stay at home Mom, so her income doesn't count. I do make $80k.

I am trying other banks, but I heard of another strategy today - which is to Co-Sign with a parent/friend with good income, to overcome the DTI. Since my Wife has no income, I am thinking to have my Father Co-Sign my loan instead - and the two of us should have a good enough DTI.

Any comments on this strategy?

@Sunny Burns I would recommend shopping around for a different lender. Our lender was able to use projected rental income from the appraisal to get our DTI where we needed. This will be our fourth rental so we will continue to be tight on the DTI standards. But there are definitely lenders out there who don't need the income to be "seasoned" at all, especially two years.

@Derek Johnson  we were able to do just that. We found a lender that would consider the rental income with signed leases. I think they only count 75% of it, but that's still more than enough.

Still waiting to hear back from them about our preapproval.

I wrote up a review of the bank, Trustco Bank we are using if anyone is interested. They are great, just not in many places. Allow you to put 10% down on up to a 4 family. And no borrow paid PMI with competitive rates.

Good news bad news. Dti goes away with a seasoning period. 1 to 2 years. A good option would be to find a lender who is willing to overlook the dti in lieu of a higher interest rate. It's a catch 22. I had the same issue but everyday, I called different lenders, Banks, private money hard money etc and found a few different options to avoid dti. Make sure you run your numbers with the calculators to verify income with higher interest rates. If you decide to do that, use this as your seasoning period to refinance with a bank for a lower interest rate and they will consider your cash flow a positive dti. Hope that helps

Also, if you are using all your cash to buy a house, that does decrease your ability to buy new rentals. And this whole game is based on cash on cash return. If you invest 40k in a property that cash flows 400 a month even after repairs and maintenance, it will still take 10 years, roughly 8-9percent returns. Might as well invest in stock market. Don't do that btw lol just a point. Find a better way to make your cash work for you. Look for 10-12 percent returns. It's more difficult but way worth it in the medium long term game.

@Sunny Burns what happened with your pre-approval and loan app with Trustco?  

I've started the process and was told they WILL NOT consider rental incomes at all on our 2nd home purchase (investment property). They also took our application and now are requesting a $299 application fee prior to underwriting and I'm timid to pay a fee for a potential decline. we are about 3pts over the DTI limits the manager told me which was high 30's.

Of course the DTI isn't an issue at all with the rental income... Also trustco is one of the few portfolio lenders in my area that will accept 20% down whereas any Fannie/Freddie lender is going to require 25% down. I'd love to get away with 20% but I'd be furious to go through the hoops of Trustco for them to tell me no after paying an application fee.

Get to a portfolio lender: a local bank who does business loans for your next properties! Fannie and Freddie are limited by guidelines. Local banks and credit unions can do deals that the big box lenders can't.

Hey, @Dane Peterson we got rejected... not sure why, but our branch manager told us to reapply, but with Potential future signed leases. So we basically got a friend to sign that they would take over our lease should we purchase a new property(since we are owner occupying one of the units); then we also got 3 other "leases" that say they would move in with us should we buy that next quadplex.

But again this could be different as we are looking to owner occupy again and only put 10.5% down.

So that was a week ago, waiting to hear back. Also there was no mention of an application fee... I feel like we paid that last time for the mortgage application not for the preapproval.

@Sunny Burns

Signed my commitment letter about an hour ago. Went very smooth. Almost too smooth.  We got our appraisal back yesterday morning then I had a VM from the manager later afternoon saying we were approved.  About 2wks from app to approval is pretty good.  Property was applied for as a 2nd home by recommendation of the manager.  20% down and a 4.625% rate on a duplex is great. Also this is going to be a rental on both sides, so should cash flow well.

Thanks for your original suggestion as up to now it's gone smooth. Also the $299 app fee wasn't required prior to underwriting. They told me it just had to be paid by closing.

@Dane Peterson glad it's been working out for ya 4.625% seems high? Is the rate higher because it's a second home? The bank last week was saying 4% and when surfeited back in October we got 3.49% for our 30year.