2nd home loan impact on primary residence mortgage?
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
4yOriginally posted by @Ryan Elam:
Hi there,
I'm just starting my journey in STRs (have 1 up and running currently) and have a question....
How do 2nd home loans impact your ability to qualify for a mortgage on your primary residence?
One of my potential partners who would need to be on our next 2nd home mortgage is also considering buying a primary residence in the next couple of years and they are concerned if we buy this next investment property under their name they would have a harder time qualifying for their primary residence mortgage.
Any insights would be greatly appreciated!
TLDR: if anyone cares about anyone's DTI, today or tomorrow, then no one should be cosigning anything, for anyone else, unless they're married (or in a relationship similarly serious in nature, with integrated or near-integrated total overall personal finances, where "can always cosign as needed and it's not a big deal" is viable). Period, full stop.
Here's how it looks in a couple years. Your cosigner, Sally, wants to buy a primary residence, or refinance, or whatever. Her credit report and that settlement paperwork says she's on the hook for the mortgage she cosigned with you, but it's not a severable or partial obligation. If the payment due is $2k, she and you are both individually on hook for the full $2k (let's suppose this is PITIA) (when you have a boyfriend/girlfriend tenant sharing a unit, you don't let the girlfriend say "here's my half of the rent, please evict my bf but not me, thanks!" do you? Same thing here, we don't let you do that either, for the exact same reasons you don't let your tenants do it), not just half of it. So in the D column of DTI, you each have the FULL $2k. But, look at this, you probably each report only half of the rental income. The total rent might be $2700 (let's stipulate that this is after write-offs for repairs, utilities, etc), but you each tell the IRS that you individually get $1350, so all we have to offset the $2000 of D is $1350 of I.
$1350 minus $2k is a negative number, unless I'm mistaken. No different than having an extra $650/mo car payment. That will reduce each person's buying power by roughly $120,000, all else equal, and making some reasonable assumptions for what we see "in the wild" and in the real world.
Re: "What about if we..." - nope. "But what about..." - nope! "OK, but then we can just..." - NOPE!
"But what if I make so much money that I really don't need to worry about my DTI, I'm a senior executive at a tech company drawing a $3.5m W2 annual salary and I only want a $1.25m primary residence" -- ok, yeah, you're probably fine, you can disregard this post, $650/mo isn't going to move the needle in an amount that we're likely to care about.
Good luck. :)
8 Replies
- 4yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
@Ryan Elam they are right it would impact their debt to income ratio so could make a primary loan more difficult. If the property is rented and generating income it would offset that liability somewhat but the length of the rental period may be a factor. He should talk to a lender. The next couple years might not be a big issue if you cash flow well.
- Denver, CO · Member since 2016 · 41 posts · 10 votes4y
Originally posted by @Colleen F.:
@Ryan Elam they are right it would impact their debt to income ratio so could make a primary loan more difficult. If the property is rented and generating income it would offset that liability somewhat but the length of the rental period may be a factor. He should talk to a lender. The next couple years might not be a big issue if you cash flow well.
Thank you, Colleen! I really appreciate your feedback.
- Phoenix, AZ · Member since 2021 · 504 posts · 282 votes4y
Have them connect with a lender. Depending on timeline, as long as it is a positive cash flowing property, it could potentially help the DTI. They take a percentage (usually max is 75%) of cash flow, but it should off-set the DTI some.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes4y
Originally posted by @Ryan Elam:
Hi there,
I'm just starting my journey in STRs (have 1 up and running currently) and have a question....How do 2nd home loans impact your ability to qualify for a mortgage on your primary residence?
One of my potential partners who would need to be on our next 2nd home mortgage is also considering buying a primary residence in the next couple of years and they are concerned if we buy this next investment property under their name they would have a harder time qualifying for their primary residence mortgage.
Any insights would be greatly appreciated!
TLDR: if anyone cares about anyone's DTI, today or tomorrow, then no one should be cosigning anything, for anyone else, unless they're married (or in a relationship similarly serious in nature, with integrated or near-integrated total overall personal finances, where "can always cosign as needed and it's not a big deal" is viable). Period, full stop.
Here's how it looks in a couple years. Your cosigner, Sally, wants to buy a primary residence, or refinance, or whatever. Her credit report and that settlement paperwork says she's on the hook for the mortgage she cosigned with you, but it's not a severable or partial obligation. If the payment due is $2k, she and you are both individually on hook for the full $2k (let's suppose this is PITIA) (when you have a boyfriend/girlfriend tenant sharing a unit, you don't let the girlfriend say "here's my half of the rent, please evict my bf but not me, thanks!" do you? Same thing here, we don't let you do that either, for the exact same reasons you don't let your tenants do it), not just half of it. So in the D column of DTI, you each have the FULL $2k. But, look at this, you probably each report only half of the rental income. The total rent might be $2700 (let's stipulate that this is after write-offs for repairs, utilities, etc), but you each tell the IRS that you individually get $1350, so all we have to offset the $2000 of D is $1350 of I.
$1350 minus $2k is a negative number, unless I'm mistaken. No different than having an extra $650/mo car payment. That will reduce each person's buying power by roughly $120,000, all else equal, and making some reasonable assumptions for what we see "in the wild" and in the real world.
Re: "What about if we..." - nope. "But what about..." - nope! "OK, but then we can just..." - NOPE!
"But what if I make so much money that I really don't need to worry about my DTI, I'm a senior executive at a tech company drawing a $3.5m W2 annual salary and I only want a $1.25m primary residence" -- ok, yeah, you're probably fine, you can disregard this post, $650/mo isn't going to move the needle in an amount that we're likely to care about.
Good luck. :)
- Denver, CO · Member since 2016 · 41 posts · 10 votes4y
Originally posted by @Danielle Jackson:
Have them connect with a lender. Depending on timeline, as long as it is a positive cash flowing property, it could potentially help the DTI. They take a percentage (usually max is 75%) of cash flow, but it should off-set the DTI some.
Thank you, Danielle! Really appreciate the input.
- Denver, CO · Member since 2016 · 41 posts · 10 votes4y
Originally posted by @Chris Mason:
Originally posted by @Ryan Elam:
Hi there,
I'm just starting my journey in STRs (have 1 up and running currently) and have a question....How do 2nd home loans impact your ability to qualify for a mortgage on your primary residence?
One of my potential partners who would need to be on our next 2nd home mortgage is also considering buying a primary residence in the next couple of years and they are concerned if we buy this next investment property under their name they would have a harder time qualifying for their primary residence mortgage.
Any insights would be greatly appreciated!
TLDR: if anyone cares about anyone's DTI, today or tomorrow, then no one should be cosigning anything, for anyone else, unless they're married (or in a relationship similarly serious in nature, with integrated or near-integrated total overall personal finances, where "can always cosign as needed and it's not a big deal" is viable). Period, full stop.
Here's how it looks in a couple years. Your cosigner, Sally, wants to buy a primary residence, or refinance, or whatever. Her credit report and that settlement paperwork says she's on the hook for the mortgage she cosigned with you, but it's not a severable or partial obligation. If the payment due is $2k, she and you are both individually on hook for the full $2k (let's suppose this is PITIA) (when you have a boyfriend/girlfriend tenant sharing a unit, you don't let the girlfriend say "here's my half of the rent, please evict my bf but not me, thanks!" do you? Same thing here, we don't let you do that either, for the exact same reasons you don't let your tenants do it), not just half of it. So in the D column of DTI, you each have the FULL $2k. But, look at this, you probably each report only half of the rental income. The total rent might be $2700 (let's stipulate that this is after write-offs for repairs, utilities, etc), but you each tell the IRS that you individually get $1350, so all we have to offset the $2000 of D is $1350 of I.
$1350 minus $2k is a negative number, unless I'm mistaken. No different than having an extra $650/mo car payment. That will reduce each person's buying power by roughly $120,000, all else equal, and making some reasonable assumptions for what we see "in the wild" and in the real world.
Re: "What about if we..." - nope. "But what about..." - nope! "OK, but then we can just..." - NOPE!
"But what if I make so much money that I really don't need to worry about my DTI, I'm a senior executive at a tech company drawing a $3.5m W2 annual salary and I only want a $1.25m primary residence" -- ok, yeah, you're probably fine, you can disregard this post, $650/mo isn't going to move the needle in an amount that we're likely to care about.
Good luck. :)
Thank you so much for your thoughtful response, Chris! Had no idea we'd both be liable for the full amount of debt so that's really good to know.
- 4yNick BelskyBusiness MemberResidential and Commercial Broker · Member since 2021 · 1k+ posts · 704 votes
It's going to hit your DTI, but the income you are generating will offset the payment and expenses somewhat. If you have enough cash flow to completely cover it, then there is minimal impact if any. Depending on the loan type you select, you may not be able to use 100% of the rental income. You may be limited to 75% which is also something to consider.
Cheers!
Belsky Mortgage, LLC527 Reviews - Denver, CO · Member since 2016 · 41 posts · 10 votes4y
Originally posted by @Nick Belsky:
It's going to hit your DTI, but the income you are generating will offset the payment and expenses somewhat. If you have enough cash flow to completely cover it, then there is minimal impact if any. Depending on the loan type you select, you may not be able to use 100% of the rental income. You may be limited to 75% which is also something to consider.
Cheers!
Thanks for that info, Nick! When you say loan type do you mean 2nd/vacation home loan vs investment loan?
Also, if the idea is to also use depreciation for tax purposes, this will negate the rental income offset, negatively impacting DTI, correct?
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