Frustration/venting post any ideas about my situation with DTI

Worcester, Massachusetts
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Frustration/venting post any ideas about my situation with DTI

Armando MontrondPro Member
Member since 2022 · 26 posts · 18 votes

Here is my current situation. 

I currently am house hacking a 3 unit home in Worcester MA. (FHA at 2.25%) I have lived here for 1 year and want to purchase another property with a low down payment. I

have found credit unions will do 5% down on 1-2 units but the banks wont use my rental income that i earned this year because I don't have 2 years of rental income history. 

Even if i had 2 years of rental history they will only take between 55-75% of that income.

I don"t have a lot of debt, I have my mortgage payment, and a student loan totaling 3900 a month. 

I W2'ed 140k last year, so if that max DTI is 45% (5,250 allowed per month in debt) and I already have 3900 in debt, I cant have a mortgage payment above $1,350 PITI? Am i doing this math right?

So even if i put 20% down on a property, with 5-7% rates, the max purchase price I can do is $265k and with a 5% down im looking at 125k which is pretty damn near impossible around here. so looks like I would have to look for out of state investment property which is not ideal. Is my rough math right? How are people buying multiple properties but getting around the 45% dti? 140K a year is not small money either so its wild that I couldn't qualify for anything other than those incredibly low amounts

Am i looking at this the right way? Is there other ways to get this done (other than out of state investing) This is mainly a venting/frustration post cause I am trying to build out my portfolio but seems like this is a tough spot to be in especially if a lender is not willing to look at the rental income that will be on my tax returns

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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
3y
Quote from @Armando Montrond:
Quote from @Rick Albert:

It's weird that they aren't counting the rental income from the other units. People do it all the time when they move and rent out their previous primary home. It is a triplex or are they not legal rentals? That could play a factor.

You could refinance the property you are in into a conventional loan, and that will allow you to use the FHA loan again. Do it now while you are a primary occupant so you get the best rate and terms.

Lenders will almost always use 75% of the income. They are factoring in vacancies, repairs, cap x, etc. 

How much are your student loans in total and the monthly payments? It only makes sense to pay it off completely if it increases your DTI and the interest rate is high. Otherwise stay the course.


you can only imagine how rattled i was when lenders were saying they wouldnt count it unless I had 2 years of rental income history. it is a legal 3 family. I could refinance and get another FHA but then I would still run into the same problem where the DTI would stop me from getting another property. My student loans arent that expensive, about $300 a month, paying off that balance would be an option but thats money I would rather use for capital. Maybe I gotta keep hunting around for other lenders


The thing about conventional / FHA is that underwriting and rates are pre-set by the quasi-gov agencies, so shopping wouldn't really help. As mentioned above, DSCR is tailor-made for you in this situation (scaling a portfolio, no DTI) - although cash-flowing with a low down payment will be challenging in this market (you can still likely qualify for a DSCR loan with DSCR <1 if you are willing to lose money in the short term though...)

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  • Khemraj Sarju Jr.
    Lender · Member since 2022 · 115 posts · 29 votes
    3y

    Investors are purchasing properties using DSCR programs which use the properties rental income to qualify them. We calculate the expenses against the rental income for our clients to approve them with out having to worry about DTI issues.

    3Reply
  • Rick Albert
    Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    3y

    It's weird that they aren't counting the rental income from the other units. People do it all the time when they move and rent out their previous primary home. It is a triplex or are they not legal rentals? That could play a factor.

    You could refinance the property you are in into a conventional loan, and that will allow you to use the FHA loan again. Do it now while you are a primary occupant so you get the best rate and terms.

    Lenders will almost always use 75% of the income. They are factoring in vacancies, repairs, cap x, etc. 

    How much are your student loans in total and the monthly payments? It only makes sense to pay it off completely if it increases your DTI and the interest rate is high. Otherwise stay the course.

    0Reply
  • Armando MontrondPro Member
    OP
    Member since 2022 · 26 posts · 18 votes
    3y
    Quote from @Khemraj Sarju Jr.:

    Investors are purchasing properties using DSCR programs which use the properties rental income to qualify them. We calculate the expenses against the rental income for our clients to approve them with out having to worry about DTI issues.


    True, DSCR is a great option, I think my main issue was that I was trying to have a lower downpayment. 20-25% on a 400-500K multi is tough for a newbie without raising funds from others 😂 but that is a good option thanks for the reminder on that

    0Reply
  • Armando MontrondPro Member
    OP
    Member since 2022 · 26 posts · 18 votes
    3y
    Quote from @Rick Albert:

    It's weird that they aren't counting the rental income from the other units. People do it all the time when they move and rent out their previous primary home. It is a triplex or are they not legal rentals? That could play a factor.

    You could refinance the property you are in into a conventional loan, and that will allow you to use the FHA loan again. Do it now while you are a primary occupant so you get the best rate and terms.

    Lenders will almost always use 75% of the income. They are factoring in vacancies, repairs, cap x, etc. 

    How much are your student loans in total and the monthly payments? It only makes sense to pay it off completely if it increases your DTI and the interest rate is high. Otherwise stay the course.


    you can only imagine how rattled i was when lenders were saying they wouldnt count it unless I had 2 years of rental income history. it is a legal 3 family. I could refinance and get another FHA but then I would still run into the same problem where the DTI would stop me from getting another property. My student loans arent that expensive, about $300 a month, paying off that balance would be an option but thats money I would rather use for capital. Maybe I gotta keep hunting around for other lenders

    0Reply
  • Khemraj Sarju Jr.
    Lender · Member since 2022 · 115 posts · 29 votes
    3y
    Quote from @Armando Montrond:
    Quote from @Khemraj Sarju Jr.:

    Investors are purchasing properties using DSCR programs which use the properties rental income to qualify them. We calculate the expenses against the rental income for our clients to approve them with out having to worry about DTI issues.


    True, DSCR is a great option, I think my main issue was that I was trying to have a lower downpayment. 20-25% on a 400-500K multi is tough for a newbie without raising funds from others 😂 but that is a good option thanks for the reminder on that


     We have been seeing 15% down in most cases the past couple months. 

    0Reply
  • Rick Albert
    Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    3y
    Quote from @Armando Montrond:
    Quote from @Rick Albert:

    It's weird that they aren't counting the rental income from the other units. People do it all the time when they move and rent out their previous primary home. It is a triplex or are they not legal rentals? That could play a factor.

    You could refinance the property you are in into a conventional loan, and that will allow you to use the FHA loan again. Do it now while you are a primary occupant so you get the best rate and terms.

    Lenders will almost always use 75% of the income. They are factoring in vacancies, repairs, cap x, etc. 

    How much are your student loans in total and the monthly payments? It only makes sense to pay it off completely if it increases your DTI and the interest rate is high. Otherwise stay the course.


    you can only imagine how rattled i was when lenders were saying they wouldnt count it unless I had 2 years of rental income history. it is a legal 3 family. I could refinance and get another FHA but then I would still run into the same problem where the DTI would stop me from getting another property. My student loans arent that expensive, about $300 a month, paying off that balance would be an option but thats money I would rather use for capital. Maybe I gotta keep hunting around for other lenders


    FHA allows your DTI to be up to 55% assuming it is owner occupied. The only caveat is if you lock in a higher interest rate on the refi then it could be a wash.

    At $300/month, that does increase your purchasing power as much as about $45,000 once you factor in property taxes and insurance. However if you owe more than that on your student loans, it wouldn't be worth paying it off.

    0Reply
  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    3y

    $5106- 3900 = 1116 at 43%   Unless you have a high FICO and lots of reserves you are right not much of a next property

    File your 2022 returns but do not write off tons of expenses as the net number is what is used. Lenders will not us "proposed future income."

    OTHER option is to do a bank statement loan where we use 12 or 24 months deposits into one account as income instead of the taxes.

    How many months do you have? 

    Yes lenders use gross rents less expense ratio of 25%.

    Once you have a year tax return we can use the net number.

    3Reply
  • Devin PetersonBusiness Member
    Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 664 votes
    3y
    Quote from @Armando Montrond:

    Here is my current situation. 

    I currently am house hacking a 3 unit home in Worcester MA. (FHA at 2.25%) I have lived here for 1 year and want to purchase another property with a low down payment. I

    have found credit unions will do 5% down on 1-2 units but the banks wont use my rental income that i earned this year because I don't have 2 years of rental income history. 

    Even if i had 2 years of rental history they will only take between 55-75% of that income.

    I don"t have a lot of debt, I have my mortgage payment, and a student loan totaling 3900 a month. 

    I W2'ed 140k last year, so if that max DTI is 45% (5,250 allowed per month in debt) and I already have 3900 in debt, I cant have a mortgage payment above $1,350 PITI? Am i doing this math right?

    So even if i put 20% down on a property, with 5-7% rates, the max purchase price I can do is $265k and with a 5% down im looking at 125k which is pretty damn near impossible around here. so looks like I would have to look for out of state investment property which is not ideal. Is my rough math right? How are people buying multiple properties but getting around the 45% dti? 140K a year is not small money either so its wild that I couldn't qualify for anything other than those incredibly low amounts

    Am i looking at this the right way? Is there other ways to get this done (other than out of state investing) This is mainly a venting/frustration post cause I am trying to build out my portfolio but seems like this is a tough spot to be in especially if a lender is not willing to look at the rental income that will be on my tax returns


    Hey Armondo, A few things:

    The rental income cannot be used because it sounds like whatever program you are using requires 2 years of income taxes. There are programs out there that will use 1 year of tax returns, like HP - but your ami sounds high for worcester, MA. The reason you can only use 75% of the income is because of the vacancy factor. These are fannie/freddie rules. Every bank has this. 45% dti is mainly for conventional. Sometimes FHA can go up to 60% in certain cases. There are a few other ways to work around this issue. Feel free to PM if you have questions how.

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    0Reply
  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    3y
    Quote from @Armando Montrond:
    Quote from @Rick Albert:

    It's weird that they aren't counting the rental income from the other units. People do it all the time when they move and rent out their previous primary home. It is a triplex or are they not legal rentals? That could play a factor.

    You could refinance the property you are in into a conventional loan, and that will allow you to use the FHA loan again. Do it now while you are a primary occupant so you get the best rate and terms.

    Lenders will almost always use 75% of the income. They are factoring in vacancies, repairs, cap x, etc. 

    How much are your student loans in total and the monthly payments? It only makes sense to pay it off completely if it increases your DTI and the interest rate is high. Otherwise stay the course.


    you can only imagine how rattled i was when lenders were saying they wouldnt count it unless I had 2 years of rental income history. it is a legal 3 family. I could refinance and get another FHA but then I would still run into the same problem where the DTI would stop me from getting another property. My student loans arent that expensive, about $300 a month, paying off that balance would be an option but thats money I would rather use for capital. Maybe I gotta keep hunting around for other lenders


    The thing about conventional / FHA is that underwriting and rates are pre-set by the quasi-gov agencies, so shopping wouldn't really help. As mentioned above, DSCR is tailor-made for you in this situation (scaling a portfolio, no DTI) - although cash-flowing with a low down payment will be challenging in this market (you can still likely qualify for a DSCR loan with DSCR <1 if you are willing to lose money in the short term though...)

    [email protected]
    Harpoon Capital514 Reviews
    WebsiteView Page
    6Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    3y

    That sounds about right on all fronts. You have a really good income, work on saving up for a larger down payment. I'm in a similar situation where my DTI is maxed out and they only count part of the rental income as income (in part because you have to pay income tax on it).

    Wait until your next year's taxes are filed and Caroline gave good advice.

    0Reply
  • Armando MontrondPro Member
    OP
    Member since 2022 · 26 posts · 18 votes
    3y

    Thanks all of you, there is some great advice here. I have a really good fico (730) but i think the best thing is just save for the higher downpayment. would love to know where you are getting 15% down on a DSCR, thats pretty great! A bit of a waiting game till the new taxes are done but hopefully can come out on the other end with another property somehow.

    0Reply
  • Lyndsay Zwirlein
    Lender · Member since 2020 · 331 posts · 209 votes
    3y

    DSCR cannot be owner occupied, so you couldn't use that if you are wanting to house hack your new purchase.

    Based on what you described, it sounds like you should have a deal here. I would recommend speaking with a lender who can use your 1 year of rental income. Also DTI can go up to 50% on a conforming loan (ie non-jumbo).

    1Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    3y

    Let's back up a second...I'm not sure you're calc'ing your DTI correctly, and I think you muddied the waters with how you presented your current debts all lumped together. By your estimate you're allowed $5,250 in debt but your rental income should directly offset your mortgage first, and then the NET result of that is either added to your income or expenses. So part of the $3,900 may be excluded from your ratio...

    I'm not a lender/loan broker so there may of course be nuances to the calc I'm not aware of since you live in one unit etc, but what you need to do is get a good loan broker who can correctly do the DTI calc's based on the loan guidelines for you and tell you exactly what you qualify for. They also (since they're a broker) will know if the lender has specific overlay's and criteria re: tax return reported rentals vs the 75% of on lease etc. and can help guide you to the lender that will work with what you're trying to accomplish.

    I'm not sure who in MA can help, but @Chris Mason is my go to out here in CA. 

    3Reply
  • Jon A.
    Investor · Brooklyn, NY · Member since 2022 · 158 posts · 118 votes
    3y

    @Armando Montrond When you don't have two years of rental history with a property, lenders are supposed to go off the leases and verify with bank statements. Some lenders have overlays that prevent it. You need to keep calling lenders until you find one that will take the rent off the lease. That should be your first question.

    Are you planning to buy a new primary? If so, the lender may also use the income on the unit you live in, as long as you sign a lease with a tenant for that space before closing.

    1Reply
  • Jon A.
    Asheville, NC · Member since 2017 · 385 posts · 274 votes
    3y

    I think one option you have is to partner with someone.

    0Reply
  • Albert Sousa
    Lender · Fort Walton Beach, FL · Member since 2021 · 48 posts · 20 votes
    3y

    Mortgage Broker here - i would highly recommend that you talk to more lenders. There should certainly be programs available where you can use a portion of the rents as long as there are leases in place on the other units. Would recommend you talk to at least one highly rated broker who has access to many different wholesale lenders - they will be able to find a lender that can work with your situation or at least give you your best chances of approval

    2Reply
  • Nick Velez
    Lender · Member since 2019 · 250 posts · 219 votes
    3y

    @Armando Montrond

    If you want to purchase a new multifamily property with a low down payment option, your best bet is to refinance out of your current FHA loan and use that for your next purchase. When you go to purchase the new property, 75% of the lease amount will be used to offset your mortgage payment. Keep in mind however, that to use rental income from your departing primary, your new primary needs to be 100 miles away if you are going FHA.

    When it comes to a 2-4 unit property, 75% of the projected rental income for the units you are not occupying can be used to offset your payment and give you more purchasing power. I am not sure if you are factoring that into your numbers currently. 

    Local credit unions have their benefits but they also tend to have overlays when it comes to your "normal" purchases. I would recommend that you talk to a mortgage broker whom works with lenders that write strictly to Fannie/Freddie guidelines. If you want to do your own research on the rules, google the Fannie and Freddie selling guides which will give you all of the guidelines that you need to know. 

    1Reply
  • Brian J Allen
    Real Estate Agent · Worcester, MA · Member since 2018 · 518 posts · 410 votes
    3y

    @Armando Montrond It is great that you are looking to buy more properties. As an active agent in Worcester, MA there are properties I am getting for clients but we are super choosy right now. There aren't many that I recommend to my buyers for purchase. The good stuff in this market is in the $650-700k range, and most of the rest of the stuff is simply junk that needs work. Most of these do not pass the FHA sustainability on the top end, and the stuff on the bottom end needs a lot of work. For my FHA buyers are looking at things with FHA 203K loans and 2 families to avoid the sustainability issue. Most of the good stuff in Worcester trades off the MLS because the agents are afraid of having them sit out there and lose value.

    1Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    3y
    Quote from @Khemraj Sarju Jr.:

    Investors are purchasing properties using DSCR programs which use the properties rental income to qualify them. We calculate the expenses against the rental income for our clients to approve them with out having to worry about DTI issues.


    Hello,

    Ok, I'm familiar with DSCR - Debt Service Coverage Ratio - as a lending criterion. It now seems to also be a new type of loan product.

    Can you provide a description of a DSCR loan and how it differs from other loan products? From what you posted, it looks like it's based on the property's income rather than the owner's income.

    1Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Armando Montrond:

    Here is my current situation. 

    I currently am house hacking a 3 unit home in Worcester MA. (FHA at 2.25%) I have lived here for 1 year and want to purchase another property with a low down payment. I

    have found credit unions will do 5% down on 1-2 units but the banks wont use my rental income that i earned this year because I don't have 2 years of rental income history. 

    Even if i had 2 years of rental history they will only take between 55-75% of that income.

    I don"t have a lot of debt, I have my mortgage payment, and a student loan totaling 3900 a month. 

    I W2'ed 140k last year, so if that max DTI is 45% (5,250 allowed per month in debt) and I already have 3900 in debt, I cant have a mortgage payment above $1,350 PITI? Am i doing this math right?

    So even if i put 20% down on a property, with 5-7% rates, the max purchase price I can do is $265k and with a 5% down im looking at 125k which is pretty damn near impossible around here. so looks like I would have to look for out of state investment property which is not ideal. Is my rough math right? How are people buying multiple properties but getting around the 45% dti? 140K a year is not small money either so its wild that I couldn't qualify for anything other than those incredibly low amounts

    Am i looking at this the right way? Is there other ways to get this done (other than out of state investing) This is mainly a venting/frustration post cause I am trying to build out my portfolio but seems like this is a tough spot to be in especially if a lender is not willing to look at the rental income that will be on my tax returns


     there're several banks/lender that do no need to have 2 years of rental income, but they will account 75% of income based on appraisal or lease agreement. 

    0Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    3y

    @Armando Montrond

    I'd just do a DSCR loan. Plus, they're so much easier and zero headaches getting them done. Then after a few years, refi it into a conventional when/if rates come down.

    1Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @John Morgan:

    @Armando Montrond

    I'd just do a DSCR loan. Plus, they're so much easier and zero headaches getting them done. Then after a few years, refi it into a conventional when/if rates come down.


    yeah, the problem with the OP is that he is the riskiest buyer ever: maximized his DTI and only put 5% down which is an indication of over-leverage.

    Even to use DSCR and to be profitable, you may need to increase your down to 25-30% to have DSCR 1.1 or above.

    2Reply
  • Billy Smith
    Shawnee Mission, KS · Member since 2016 · 716 posts · 313 votes
    3y

    For me it’s about conservative lenders they will not allow what other lenders will allow .But you will get better rates less junk fees too so I stick with the conservative lenders .One issue that I did not like no HELOCS on rentals paid off only homes lived in .

    0Reply
  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    3y

    @Armando Montrond several choice out there depends on state for 15% down ---- only problem is in any high cost area the rents won't work to cover as rents are much lower than PITI+HOA plus reserves there even is 10% down if it cash flows

    0Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    3y
    Quote from @David Dachtera:
    Quote from @Khemraj Sarju Jr.:

    Investors are purchasing properties using DSCR programs which use the properties rental income to qualify them. We calculate the expenses against the rental income for our clients to approve them with out having to worry about DTI issues.


    Hello,

    Ok, I'm familiar with DSCR - Debt Service Coverage Ratio - as a lending criterion. It now seems to also be a new type of loan product.

    Can you provide a description of a DSCR loan and how it differs from other loan products? From what you posted, it looks like it's based on the property's income rather than the owner's income.


    There are two types of DSCR commonly known currently, 1) the actual DSCR in the commercial world where you net out all operating expenses and the left over NOI or net operating income over your debt service is done to arrive at a ratio of 1.00-1.25X, 2) the gross income DSCR loans where the appraiser has to go out and determine gross market rents and this rent has to be a ratio of your monthly PITIA payment in residential lending.

    The later is the gist of the DSCR rental product and most of the these rental income DSCR (not true DSCR) products need to meet .70X- 1.1X to pass muster or get approved. The best pricing on these DSCR rental products are at 1.1X and higher up to 1.3X but in today's environment where the rates on these products are in the upper 7-9's even getting 1.00X is tough in pricier markets.

    What I've found is that in west cost or more expensive markets the ratio is much lower and the borrowers have had to bring in more equity/down payment, or reduce their loan amounts/LTV's.

    0Reply
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