Why is DTI so hard to overcome?

12 Replies


Long story short is that I’m trying to buy a second Fourplex and lender’s are quick to say no.

I currently own one SFR in Oklahoma, and one Fourplex in Kansas City that I owner occupy. My wife and I are trying to buy another Fourplex to owner occupy and banks are giving us a hard time about DTI.

I looked everywhere and read a few books and can’t seem to find the missing puzzle piece.

1. All the properties cover the mortgage and then some.... even when I am (and will) live in them.

2. I have about 1.5 years so far of “landlord” experience but only partial year reports on my tax return.

3. My W-2 job is about $80k a year.

I’ve heard the lender should just add the difference (positive or negative) to my income and not count the mortgage to my debt.

But I've also heard they take 75% the rent -PITIA and include the debt. So every property that would "break even" with that puts that DTI as 100%. Am I missing something?


Look into a commercial portfolio lender. The terms will not be as sweet but they look primarily at DSCR (debt service coverage ratio) and assets instead of DTI. We pay 25% down with 20 year 5/1at 5-6% interest arms to get financed but the upsides are that you can hold properties in an LLC, no w-2 income is required, financing is available over 4 units.

Normally they need 2 year of back tax filing. I understand DTI <43% with all mortgages inclusive and rental income shown on tax returns . Check with a loan broker.

@Grayson Gist

Typical banks want two 2 years of full rental to count your currently cash flow from properties.

So, the banks take your $80k and divide it up to all your properties. They don’t care how much of your cash flow has been saved in the last 1.5 years.

I would look into "hard money lenders," they don't care as much about DTI but more about what you've done and what the current deal looks like.


@Grayson Gist

Banks believe you're a investor scam... in 2008-2010 banks saw plenty of investor scams. Owner occupied properties are one SFR and one SECOND HOME... anything else is a commercial loan or investor scam...

If you pull it off and you get caught, they’ll call your loan immediately and then look at everything you’ve purchased as a bad loan!!


@Grayson Gist

There are a couple of reasons:

  • Occupancy fraud is the number one type of fraud in the mortgage industry
  • Most people buy a 4 unit and then move up to a single family; they don't continue to buy 4 unit properties
  • FHA expressly says in its guidelines that "FHA will not insure a mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured will be the only one owned using FHA mortgage insurance." https://www.hud.gov/sites/documents/4155-1_4_SECB.PDF ... so if you're trying to use FHA, you could be running into that guideline
  • Over 2 units, FHA requires the property to pass a self sufficiency test as well, meaning 75% of the market rents must cover the mortgage amount and they also have to apply a market vacancy rate to the mix.

Lots of reasons to just live where you're living now and get a portfolio loan that has none of the above guidelines.


@Grayson Gist

I would definitely look into a commercial lender. I've got one that will do fourplexes that's very inexpensive. 

Commercial lenders are going to look more closely at the property, while still looking at your financial situation as well. The property cash flowing well above their requirements will help offset any discomfort they have about your personal cash flow. Having more liquidity, or cash laying around, on your end will make them more comfortable as well.

They're also going to look at your current portfolio's performance. If you've bought several properties as a new investor in the last year and a half and they're hardly cash flowing then the bank might tell you to slow your roll.

There are multiple factors that all weigh against each other, so a good conversation with a business banker will help.

@Grayson Gist most banks take rental income times .75 minus PITI to get the plus or minus income added to your normal income.

What's your DTI? You're having issues most likely because you're trying to owner occupy another 4-plex which isn't a DTI issue if that's the case.

Most but not all banks require 2 years of tax returns with properties on them.

Originally posted by @Grayson Gist :

@Caleb Heimsoth

So after two full years of taxes, would they still include the mortgage in my debt section of my DTI?

 Yes it’s debt so that’s where it goes 

Originally posted by @Grayson Gist :

@Stephanie P.

I found a portfolio lender! Will DTI always be an issue, even when I have two years?

Yes if your lender requires tax returns and pay stubs.  

The rate will be better because the risk is less, but the qualification is harder.