Lakewood, OH · Member since 2014 · 32 posts · 5 votes
Hey All,
I am having some trouble understanding how DTI is calculated and it seems that the different lenders I have talked to are telling me different information.
I have 1 year of landlord experience renting half my duplex and just filed my first schedule E in 2015. My schedule E shows rent income, and after expenses such as repairs, taxes, utilities, etc, I ended up with a net loss. Is this going to negatively affect my DTI?
Further, I am looking to purchase two more properties this month. Will my lender be able to use rental income from those properties when calculating the DTI in the loan approval process?
@John T. how are you keeping your books and accounting? I have 10 years of experience in banking and know that lenders love reporting that shows exactly what is going on in your finances. Your tax documents are just part of the story.
As for bankers not giving a straight answer, there is a lot more than just ratios that go into the lending decision. It is the risk appetite of the bank at that time and other factors as well.
@John T. Income is calculated differently for taxes than it is for banks...this can be a source of confusion. The Schedule E forms for your taxes allow you to deduct depreciation. A typical investment property may be depreciated to $0 over 30 years.
This is advantageous for tax purposes because you claim little to no income (for tax purposes) while in reality you are enjoying nice returns.
The banks look at the numbers differently when calculating Income. They do not include depreciation. Thus, a property that has a negative income after depreciation should not hurt you from the bank's perspective.
However, if you managed to lose money on the rental property without including depreciation, then yes, it will probably hurt your DTI ratio and negatively impact your ability to borrow.
You may want to research asset based lending. No tax returns are required nor do your personal income or debts play a factor in approval. Credit and cash flow are the determining factors. Good luck!
Your lender should be able to explain this to you.
Typically, banks will count 75% of gross rental income toward your debt-to-income ratio. Many loan products also require landlord seasoning of up to 2 years. This means that you must show two years of tax statements with a schedule E. They want to see your landlording experience--it doesn't have to be the same property. We are now seeing loan products where this requirement is relaxed.
Also, with investment property, be prepared to show reserves. This is often the equivalent of 6 months of mortgage payments. Many lenders will accept a retirement account for this.
If you are looking to acquire more properties in the near future, I highly recommend you start talking to lenders immediately to compare products and guidelines.
@John T. how are you keeping your books and accounting? I have 10 years of experience in banking and know that lenders love reporting that shows exactly what is going on in your finances. Your tax documents are just part of the story.
As for bankers not giving a straight answer, there is a lot more than just ratios that go into the lending decision. It is the risk appetite of the bank at that time and other factors as well.
A ratio that indicates what portion of an individual's income is used to make mortgage payments. It is calculated as an individual's monthly housing expenses divided by his or her monthly gross income and is expressed as a percentage.
'Back-End Ratio'
A ratio that indicates what portion of a person's monthly income goes toward paying debts. Total monthly debt includes expenses such as mortgage payments (made up of PITI), credit-card payments, child support and other loan payments. Lenders use this ratio in conjunction with the front-end ratio to approve mortgages.
I agree with @Micah Dickson. All banks are different and there are so many variables in the decision making process. I think that is why forming a relationship with a bank is important. You will come to know what they expect from different deals. You may have a small bank for the smaller deals or deals in certain locations and a bigger bank for another type of deal. Good luck!