CALCULATING DEBT TO INCOME RATIO

2 Replies

This can be tricky to figure out especially if you currently have rental property and write off a lot on your taxes.

One great question to ask your lender is what is their debt to income allowance for a conventional mortgage?

Many lenders allow different percentages, of debt to income ratios. Just because you can't get approved by one lender doesn't mean you won't qualify with another lender.

First when calculating your MONTHLY DEBT - use only the minimum payments. This is what lenders go by, the minimum payments, not the actual payments made. Make sure you add in the mortgage of the property you are looking at also.

Next to calculated your income add up all of your monthly income - including wages and rental income. Make sure to include the property that you are looking to purchase's income and add this into the mix also.

Divide your monthly Debt by your Monthly income and that is your debt to income ratio. The lower the number the better.

Like I said it gets very tricky when you have rental property with many write-offs and different lenders allow some write offs to be put back into your income.

This is just a general and simple way for beginners to get an idea if they will qualify for a mortgage.

The smaller the payments the better and the less the debt the better to qualify for a mortgage.

I have worked with several borrowers that have been denied a mortgage, from other mortgage companies, but I have been able to get approved.

An important factor when talking to a loan officer is to ensure that they are able to understand how to calculate the proper income from an investors tax returns, as this can make or break an investors ability to qualify for a mortgage if not calculated properly.

Bringing this post back from the dead. 

Adding the new mortgage and rental income to your DTI only works if you have 2 years of landlord history correct? How do you get around the very high DTI ratio if you can't count part of the rental income from the new investment property?

Yes that is the case for some lenders. Some lenders have the ability to choose Fannie Mae or Freddie Mac To decision the loan. Fannie Mae doesn't require a two year history. You have the ability to use one year tax return or current leases in the property or potential income (determined by the appraiser) prior to the purchase of the property. A credit of 75 percent is given when a one year lease or the potential income is used as the factor. 

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here