Debt To Income Limitations

13 Replies

My question is on debt to income ratio and how that metric limits your ability to obtain additional mortgages in order to expand your MF residential real estate portfolio.

When I purchase my first MF residential property, with the intent of holding onto to it for the long term, it will be difficult to get approved for another mortgage as I will be close to my debt to income ratio limit.

Are there strategies or suggestions on how to best navigate the debt to income ratio limits for a buy and hold strategy investor?

Thanks

@Duke M.

There are a couple concepts to consider. You can use the cash flow and depreciation as income that helps improve DTI. It will need to show up on your tax returns and you'll need at least two years of it. A second option is to use commercial loans where your DTI doesn't matter. What does matter is your DSCR. It must be 1.25 or better. You'll need to own the property in a LLC or other entity. The interest rate will be about 1% or higher then a traditional residential loan.

Good Luck.

@Duke M. I second what @Kenneth Garrett said. Reporting the income of your rentals should offset debt to income. If you have issues with that commercial is the way to go. I've got lenders in OKC that are helpful in projecting/advising around what you'll need income wise to offset. What market are you in? 

@Kenneth Garrett I appreciate you getting back to me with your suggestions. I am brand new to this, 23 years old and about 9-12 months from buying my first MF residential property. I’d prefer to purchase either a triplex or fourplex.

Will a commercial lender lend on something 4 units or less and do they look for experienced investors/landlords? If the numbers works I would not have a problem paying a higher interest rate if that gets me into my first property sooner.

Would the same DTI ratios apply to portfolio lenders and hard money lenders?

@Duke M.

You can acquire commercial loans on single family rentals and up.  When you get to 5 units or greater in a building you must use commercial lending.  Residential is not an option.  Experience will come into play.  If you have experienced people on your team that will help.   I partnered with an experienced investor on my first one and after that I was good to go.  I’m not saying you can’t do it on your own, it really depends on the lender.

I have found the best options with lenders has been small local lenders and credit unions.  The big banks are difficult to work with in my opinion.

Portfolio lenders will most likely want to see some experience. The ones I have talked to don't seem to considered with DTI as long as the property cash flows. Hard money lenders I would think would do the same. I only use private lenders and small local banks. I have talked to many portfolio and hard money lenders I just never pulled the trigger. I did not like the terms. Interest rate was too high. 6-7%.

@Aaron Hanson

I had attended a training they had put on and built a relationship with him. The arrangement was I would secure the funding on the BRRRR project and he bought the property with a private lender and completed the rehab. I then bought him out the following year. We both made money on the deal.

@Duke M.

Although a commercial loan is possible in this situation, given your circumstances and what you’re looking for a residential loan will probably make more sense for you.

In this case DTI is very important. You should know that you can use 75% of the monthly current rent as income when qualifying, if there is no current rent (because a unit is vacant) an appraiser will assign a monthly rent figure to use based on the market.

I've been in the business for a while, I find that because rent can be used to qualify that in general DTI is less of an issue for borrowers buying Investment Properties then the larger down payments or reserve requirements.

Best of luck.

Originally posted by @Duke M.:

My question is on debt to income ratio and how that metric limits your ability to obtain additional mortgages in order to expand your MF residential real estate portfolio.

When I purchase my first MF residential property, with the intent of holding onto to it for the long term, it will be difficult to get approved for another mortgage as I will be close to my debt to income ratio limit.

Are there strategies or suggestions on how to best navigate the debt to income ratio limits for a buy and hold strategy investor?

Thanks

As others have mentioned, call around to some banks as some can get more creative with counting income. Keep in mind government backed loans such Fannie Mae will have similar restrictions no matter where you shop. My bank can count a brand new rental's partial rent income if it is at least a 12 month lease. Otherwise, commercial loans are in-house, meaning one bank will not necessarily see another bank's loan. Something to think about.

Forrest Faulconer 

@Duke M. why not utilize conventional if you're doing under 4 units. I'd try to get away with house hacking it if possible. Bringing only 5% down (plus what you pay over asking/appraisal in order to lock down a deal in this crazy seller's market) allows you to buy another sooner! Is that an option at all? 

@Kiera Underwood , house hacking and 5% down is something I am be able to do. I’m pre approved for $500K so thats good. However, I want to see how this year pans out with the housing market and overall economy.

I’m 23 so another 6 months or so is not going to hurt me in the long run. Plus I can continue to educate myself by asking questions and reading other forums on BP. You all have been very helpful with my many novice questions. Plus there are other real estate investing and property management books I want to read over the next couple months.

Any other feedback please feel free to share. I really appreciate it from everyone!

@Brian M.  It takes a bit of evaluating to feel ready to pull the trigger. I'd start looking at everything that comes up that even comes close to your criteria, decide why it would or wouldn't work for you. Get comfortable understanding what questions you should be asking and how you should be looking at things. That way when the right property does come along it's not too much too fast! 

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