I must be missing something. I live in Texas and I'm in the process of buying my first rental property. I'm applying 25% down on my first property. After reading so much on BiggerPockets about investing with little or zero down, I'm still confused about how I should be factoring rental cash flow as part of the Debt:Income ratio requirement for mortgage qualification? How much can be considered and how long before it will be considered, etc?
The DTI calculation looks like this:
Income = total income from all non-rental sources
Debt = total debt payments on non-rental debt
Net rental income = Total of your Schedule E for existing property + (75% * Rent - PITI for new property)
Knowledgable lenders will add depreciation back into the totals because that's non-cash.
If Net rental income is positive, DTI = (income + net rental income)/debt
If you have a net rental loss, DTI = income / (debt + net rental loss)
Most lenders want two years landlord experience before they count the rent. Before that the mortgage is just another debt.
Policies do change, so you most accurate source of info will be your lender or mortgage broker.
thanks @Jon Holdman I had heard the 75% call but didn't fully understand. The 2 yr history helps too. If I understood you properly, that's a starter consideration as one enters the industry not an ongoing thing. So, two years in, one could immediately (w/i 2-3 months of rental, Claim that income towards DTI, right?
I believe "two years" means "two tax returns" showing the rental income. But does that mean 13 months? I don't really know.
It's really important that you get with a Loan Officer that knows how to structure your future purchase. He/She should also be able to walk you through the process so that you understand what everything means in regards to your DTI, 75% of lease agreements, the difference between freddie and fannie rules etc.
Oh and to answer your question you can use rents right away towards your income for purchase or refinance Sir.
If the property you are buying is already rented or if you manage to get a lease signed prior to closing, 75% of rent will count towards your income. If a rental property did not show up on your schedule E for your 2012 and 2013 returns, a valid lease will get your 75% rent as income. If it does show up on those two returns, whatever income you claimed would be used as your income. Personally I have not had anyone accept rent as income without a lease.
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