Owner occupant without enough equity to secure financing to move.

10 Replies

Hi everyone,

I'm new here so forgive me if I am asking a question that I can find the answer to easily.

I am an owner occupant in a hot rental area of Philadelphia. I want to move on to another house and convert my current house to a college rental. Rent in Manayunk is pretty much guaranteed due to the number of college students, young families, young professionals, and an A+ grade school rating.

My issue is, I bought my house a year ago only putting 8% down. When looking for a loan I am told that I must have 30% equity in my current home in order to count rental income towards my debt to income ratio.

I am confident that my current house will rent for more than the mortgage so I am not afraid of moving out and buying another home. I just need the financing. My real debt to income if you count renting out my house would be awesome.

Am i being too ambitious?

Are there creative ways to get around this DTI issue?

Thanks for any reply or direction to another thread!

-Matt

Unfortunately banks don't work off of what your hopes are. They usually want to see 2+ years of rental history in order to count rental income towards your DTI. Your situation sounds a little too slim to really hope for an additional loan. Have you considered renting somewhere else instead of buying another property?

@Account Closed pointed out, they require 2 years of rental income to count towards DTI ratio.

I know Manayunk and one alternative is to rent out rooms in your apartment. You could probably fetch at least $500/rm. Although it definitely depends on your comfort level and the size of your house.

@Account Closed - Your "real debt to income" may not be as awesome as you think. You may not even get positive cash-flow in that rental, especially with only 8% down. Once you consider maintenance, repairs, vacancies, advertising, etc. Most of us here on BP assume that we will only put 50% of the gross rent into our pockets. And then, subtract out the mortgage payment on top of that.

@Michael Siekerka I have not considered renting somewhere else, I want to be on the receiving end of rent checks!

@Brandon Cao

@Bryan L. Thanks for your input! My neighbors rented for 8 years, just left. The other house has been rented for 4 years straight. The house I own was rented for 22 years. Can I use historical data to persuade a bank to approve a loan?

my current house will rent for more than the mortgage

That's a start, but that doesn't mean its cash flow positive. Banks use a rule of thumb:

net rental income = (75% * rent) - PITI

I think that's even a bit on the optimistic side. The rule @Bryan L. alludes to says

cash flow = (50% * rent ) - P&I payment.

That rule does assume a property manager, so you can earn that chunk for yourself if you do the PM job.

A boarding house is a different sort of beast from a regular rental. Be sure you're in compliance with zoning laws if you go down that road.

If you do decide to rent rooms of the house you're living in banks consider those roommates and often won't consider that income. But, yes, you will have to report it on your taxes. That creates a complex depreciation situation, too. Plan on paying for a tax professional, at least at first.

@Account Closed - You have some historical data from a pretty small sample size. I wish someone had told me years ago before I got into rental properties - the actual, real, long-term averages say that you will likely only put 50% of the rent into your pocket and then have to pay the mortgage on top of that.

Let me give you an example. I recently had tenants who had been in the house for several years. So, no vacancies for several years. And they never reported any repairs either. Low and behold, he lost his job and I eventually had to evict. Now I'm seeing the repair bills. Thousands of dollars worth, plus the cost of the eviction, plus the advertising, plus the time that it's sitting empty while we get it repaired, plus the utilities that I'm having to pay while we are getting it repaired.

If you are counting on your success being better than average, then good luck to you. I see from your profile that you are an engineer, so I know that you understand the math well enough to know that it's very possible to flip a coin on heads three or four times in a row (or more), but also, that's just luck.

Thanks @Bryan L. !

I am learning a lot from just this post!

Can you give me some more insight?

If a house is purchased fro 100K @10% down. That leaves me with a $480 mortgage, total bills (insurance+mort+taxes) = $625.

If the same house is purchased with larger down payment, those payments would be lower and my cash flow higher.

Do you see a clear upside of a higher down payment for a new investor looking to acquire a few more properties?

Thanks!

Originally posted by @Account Closed :
Hi everyone,

I'm new here so forgive me if I am asking a question that I can find the answer to easily.

I am an owner occupant in a hot rental area of Philadelphia. I want to move on to another house and convert my current house to a college rental. Rent in Manayunk is pretty much guaranteed due to the number of college students, young families, young professionals, and an A+ grade school rating.

My issue is, I bought my house a year ago only putting 8% down. When looking for a loan I am told that I must have 30% equity in my current home in order to count rental income towards my debt to income ratio.

I am confident that my current house will rent for more than the mortgage so I am not afraid of moving out and buying another home. I just need the financing. My real debt to income if you count renting out my house would be awesome.

Am i being too ambitious?

Are there creative ways to get around this DTI issue?

Thanks for any reply or direction to another thread!

-Matt

HI Matt,

This is a good question that you posed. Here is some back ground on it from the trenches:

The rule you're probably referring to with the required 30% equity to use 75% of gross rents minus PITIA ( monthly principal/interest/taxes/interest/assessments) is a buy and bail provision from Fannie Mae which requires you to have sufficient equity in order to use rents because they are afraid you'll buy a new property and bail on your current one which was common in the past. In order to advert these stringent rules of 30% equity requirement (appraisal or drive by BPO) on your current primary to use rental income I've had borrowers who moved back to their parents or out to an apartment (vacating the primary) and just started renting the property out. This is a way to use rental income even if the equity is NOT there currently.

At the banker where I am at, New American Funding Only, I've been able to get underwriter to accept the use of rental income on a prior vacated primary residence If i can document that rental checks have been coming for a min of 6 months prior to being able to use the 75% of gross minus PITIA formula. How it works is if this formula is positive then its added to your income. If this formula ends up as a negative figure then you add that figure as a monthly obligation similar to a mtg or car payment to calculate debt to income ratios. There is no written scripture on how long you actually have to have rental income to consider it a rental this is only from my experience and each banker will determine their own fine line of how much risk they'll want to take on this.

Freddie mac will require 2 years landlord experience documented via tax returns - max of 4 financed properties

Fannie Mae - will not require 2 years landlord experience or any at all to consider rental income in your DTI - max of 10 financed properties but severely restricted from fin props #5-10 (720 ficos, 6 months reserves, more down payment etc)

Hopefully that helps you in what you're looking to accomplish.

@Account Closed - There are trade-offs. Higher down-payment will provide better cash-flow, but lower returns on your cash. Every investor is different and has different goals, assets, and capabilities. Another thing that you will want with rental properties is cash reserves. Do you have an extra 5-10K lying around for roof repairs, HVAC replacement, etc?

Originally posted by @Account Closed :
@Michael Siekerka I have not considered renting somewhere else, I want to be on the receiving end of rent checks!

Very understandable - however you don't have to own a home to collect rent and/or own a rental property. I have not owned my residence for around 3 years now and if anything my investing has benefited from this. When I owned my residence, I spent a lot of evenings/weekends doing updates, doing general maintenance, cleaning/mowing the yard, etc. Not owning my residence means somebody else has to worry about all of that stuff for me and I can focus on my income producing properties, building my business, sourcing deals, traveling - you name it.

Even though you "own" your home now, you are still paying rent. The bank is leasing you the money used to buy the house and you have to send them a check every month for the next ~30 years. Talk about a long-term lease!

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