Debt to income ratio - How to overcome?

Starting Out
7yFollow

Debt to income ratio - How to overcome?

Lawrence Paul
Rental Property Investor · Montgomery County · Member since 2019 · 72 posts · 9 votes

Hello again,

I am currently struggling with my debt to income ratio with the purchase of my first income property.

Only have one car payment and my personal property (mortgaged), which I plan to turn into a rental in the short term.

My debt to income ratio is currently high (~42%).

Any way to lower this once I try to make a move into my third property?

Going to pay off my car, but even then my debt to income ratio will be rather high!

Trying to use leverage to my advantage, but this seems much harder than I had originally thought...

I feel as though I have hit a hard stop due to this debt to income ratio!

Advise? Help? Ideas?

0Reply
27 views

Most Popular Reply

Craig Jeppesen
Rental Property Investor · Chubbuck, ID · Member since 2018 · 532 posts · 466 votes
7y

That is a really high debt to income ratio. If you will still be high once the car is paid off that means your mortgage is too much for you. There is only two ways to get a better ratio; increase your income and decrease your monthly debt payments. If the problem is the house probably time to list.

1Reply
See this reply in the discussion

14 Replies

Jump to latestLatest
  • Craig Jeppesen
    Rental Property Investor · Chubbuck, ID · Member since 2018 · 532 posts · 466 votes
    7y

    That is a really high debt to income ratio. If you will still be high once the car is paid off that means your mortgage is too much for you. There is only two ways to get a better ratio; increase your income and decrease your monthly debt payments. If the problem is the house probably time to list.

    1Reply
  • Lawrence Paul
    OP
    Rental Property Investor · Montgomery County · Member since 2019 · 72 posts · 9 votes
    7y

    My primary income generates 4200 a month and the mortgage is only 640 a month.

    Feel like I am between a rock and a hard place right now.

    I do not spend much outside of my 'debt' and comfortably pay off all of my bills every month.

    0Reply
  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    7y
    Originally posted by @Lawrence Paul:

    My primary income generates 4200 a month and the mortgage is only 640 a month.

    Are you figuring your DTI correctly? If that will be your only debt once your car is paid off, that's not a high DTI, that's low (15%).

    There's a DTI calculator at this link you can use to run the numbers yourself, but you're looking pretty good unless you left something out:

    Calculate Your Debt-to-Income Ratio

    0Reply
  • Clifford Paul
    Rental Property Investor · Member since 2018 · 483 posts · 956 votes
    7y
    Originally posted by @Kyle J.:
    Originally posted by @Lawrence Paul:

    My primary income generates 4200 a month and the mortgage is only 640 a month.

    Are you figuring your DTI correctly? If that will be your only debt once your car is paid off, that's not a high DTI, that's low (15%).

    There's a DTI calculator at this link you can use to run the numbers yourself, but you're looking pretty good unless you left something out:

    Calculate Your Debt-to-Income Ratio

     Something is off unless you have other debt you did not mention. 

    $640/4200 is 15% DTI

    $1800/4200 is 42% DTI

    That's a $1160 a month difference... You must drive a real nice car. 😋 Or have other debt you didn't mention.

    What a lot of us investors do when we exceed our DTI limit through conventional financing. Is get in house/portfolio loans at local bank or credit union.

    0Reply
  • Lawrence Paul
    OP
    Rental Property Investor · Montgomery County · Member since 2019 · 72 posts · 9 votes
    7y

    I might have to try a local credit union.

    There are of course taxes and insurance to add in and there is also a HOA for both properties.

    0Reply
  • Mark Burlison
    Member since 2018 · 83 posts · 51 votes
    7y

    I tried a different bank when I ran into this issue. My realtor had a recommendation that helped get the deal done! 

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    7y
    Originally posted by @Lawrence Paul:

    I might have to try a local credit union.

    There are of course taxes and insurance to add in and there is also a HOA for both properties.

    Very slowly, we're getting more of your story. What about: the income from your first investment property? If it's not enough to help your DTI, what went wrong?

    ie. The aim for investment returns is to lower your DTI!

    And you should ask yourself the same question regarding your soon-to-be-ex-primary. Will its income (less mortgage and all its other expenses such as HOA fees) help your DTI? If not, why not? Cheers...

    0Reply
  • Lawrence Paul
    OP
    Rental Property Investor · Montgomery County · Member since 2019 · 72 posts · 9 votes
    7y
    Originally posted by @Brent Coombs:
    Originally posted by @Lawrence Paul:

    I might have to try a local credit union.

    There are of course taxes and insurance to add in and there is also a HOA for both properties.

    Very slowly, we're getting more of your story. What about: the income from your first investment property? If it's not enough to help your DTI, what went wrong?

    ie. The aim for investment returns is to lower your DTI!

    And you should ask yourself the same question regarding your soon-to-be-ex-primary. Will its income (less mortgage and all its other expenses such as HOA fees) help your DTI? If not, why not? Cheers...

    Sorry if my first post was not as clear as I had tried to make it.

    Going to look into a property that can help lower my DTI Ratio for the third property.

    Rookie mistakes, I guess.

    Thanks for all of the advise and help so far everyone.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    7y
    Originally posted by @Lawrence Paul:
    Originally posted by @Brent Coombs:
    Originally posted by @Lawrence Paul:

    I might have to try a local credit union.

    There are of course taxes and insurance to add in and there is also a HOA for both properties.

    Very slowly, we're getting more of your story. What about: the income from your first investment property? If it's not enough to help your DTI, what went wrong?

    ie. The aim for investment returns is to lower your DTI!

    And you should ask yourself the same question regarding your soon-to-be-ex-primary. Will its income (less mortgage and all its other expenses such as HOA fees) help your DTI? If not, why not? Cheers...

    Sorry if my first post was not as clear as I had tried to make it.

    Going to look into a property that can help lower my DTI Ratio for the third property.

    Rookie mistakes, I guess.

    Thanks for all of the advise and help so far everyone.

    If your primary would be / was a rookie mistake as a pure investment, you now know what to do: Sell!

    Right? (You did ask for suggestions). 

    If you're against Selling, then how else can you get you DTI down? See what I mean?

    ie. Would you please explain your rationale? 

    [Note: In general, I'm (also?) against selling good Real Estate. But, how does one define "good", if it doesn't help with ones stated goals? ie. In this case, allowing you to buy more/better investments.]...

    0Reply
  • Lawrence Paul
    OP
    Rental Property Investor · Montgomery County · Member since 2019 · 72 posts · 9 votes
    7y

    Great point.

    I did not even consider DTI ratio when I started.

    Might have to start looking at property that does not have a HOA.

    0Reply
  • Lawrence Paul
    OP
    Rental Property Investor · Montgomery County · Member since 2019 · 72 posts · 9 votes
    7y

    Just to send out an update on my monthly numbers:

    Gross Income 4720+1200(rent)=5920

    1st Mortgage 637 or 578(after pmi is paid)

    2nd Mortgage 351

    Home insurance 40

    HOA fees 520

    Other (property taxes) 282

    Paid off my car and now seeing a DTI of 30.91%

    Is there another way to calculate potential rental income from a property because my bank only calculated in all possible expenses without calculating in any potential income?

    This is what caused my issues in the first place!

    Final thoughts: 

    If one ever runs out of DTI ratio or leverage, would it be better to pay off the existing mortgage(s) or pay cash for another investment?

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    7y

    @Lawrence Paul, my guess is that the "bank only calculated in all possible expenses without calculating in any potential income" because: you still have to live somewhere!

    ie. What about the new mortgage that'll relate to your next primary?...

    [Note: there is no one-size-fits-all answer to your question: "would it be better to pay off the existing mortgage(s) or pay cash for another investment?" - but, that would be a nice dilemma to have!]

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    My bank uses half the rent as the rental income.  They also insist on adding in the cost of heat despite the tenants paying for that.  Find out what your bank does and ask them if you have questions.  Glad you paid off the car.

    0Reply
  • Lawrence Paul
    OP
    Rental Property Investor · Montgomery County · Member since 2019 · 72 posts · 9 votes
    7y

    Came across this on the Fannie Mae website:

    " Treatment of the Income (or Loss)

    The amount of monthly qualifying rental income (or loss) that is considered as part of the borrower's total monthly income (or loss) — and its treatment in the calculation of the borrower's total debt-to-income ratio — varies depending on whether the borrower occupies the rental property as his or her principal residence.

    If the rental income relates to the borrower’s principal residence:

    • The monthly qualifying rental income (as defined above) must be added to the borrower’s total monthly income. (The income is not netted against the PITIA of the property.)
    • The full amount of the mortgage payment (PITIA) must be included in the borrower’s total monthly obligations when calculating the debt-to-income ratio.

    If the rental income (or loss) relates to a property other than the borrower's principal residence:

    • If the monthly qualifying rental income (as defined above) minus the full PITIA is positive, it must be added to the borrower’s total monthly income.
    • If the monthly qualifying rental income minus PITIA is negative, the monthly net rental loss must be added to the borrower’s total monthly obligations.
    • The full PITIA for the rental property is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation.
    • The full monthly payment for the borrower's principal residence (full PITIA or monthly rent) must be counted as a monthly obligation. "
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free