Frustration/venting post any ideas about my situation with DTI

Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes

3y

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

If you make what you say you make and your max is 45-50% then you only have that 5250-6000 corridor of expenses you can handle before you file hits "redline."

You'll either need to make more money, bring in coborrower's, or use rental income offset's (75% of gross leases) to help offset your current mortgage that is 3900 dollars in order to free up room to qualify for the new property.

This is why mortgage planning is important because the timing of it matters.

For instance, if you were to try to leave your current property and use FHA you wouldnt be able to use rental income offset when leaving your prior primary due to the FHA 100 mile rule. How do you get around it? You move out pre-emptively of course for 6 + months (to another apt, house, family, etc) then you apply for FHA after you've secured long term leases for your prior home (the one with 3 units). Now you can potentially use FHA however being that you already have a FHA loan existing at a super low rate you probably wont want to refinance that loan to use FHA again (because you can only have 1 FHA loan barring an exception).

So that leaves you with conventional 5% down on a 1 unit property. Conventional financing doesnt have any funky rules so you can just setup all of your leases on the 3 unit (current primary) and then go apply for the new property. The 3 leases you have will help offset your 3900 monthly payment assuming your leases are "high enough," to do so (counted at 75% of the gross lease figures combined - monthly payment of 3900 = net).

The situation doesnt seem so tough, its only because you're dealing with local lending firms who may not know the guidelines well enough.

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Yoon Ji

Investor · Phoenix · Member since 2021 · 4 posts · 0 votes

3y

Quote from @Caroline Gerardo:

$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.

"File your 2022 returns but do not write off tons of expenses as the net number is what is used."

@Caroline Will the lender not count the rental income for DTI calculation if the expenses/depreciation is greater than the gross rental income?

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Caroline Gerardo

Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes

3y

@Yoon Ji if your net rental income is a loss: Lender looks at number of months rented and the lease and hits DTI with that loss. Often the first year has a large loss for repairs, advertising, and learning curve. Therefore in planning to apply for a full documentation loan losses hurt a borrower. Many new investors fail to get their taxes and application reviewed before they jump. They get a hard money loan and cannot refinance due to net losses on IRS taxes. Sure the losses offset w-2 income and maybe get a refund but they hurt in the conventional loan underwriting. Depreciation is the only line item loss added back to gross rents.

There are other types of loan products that don't use two year taxes averaged- bank statement loans, DSCR loans, asset depletion loans... Again preparing a year in advance and understanding your options is important to using loans as leverage to grow.

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Yoon Ji

Investor · Phoenix · Member since 2021 · 4 posts · 0 votes

3y

Quote from @Caroline Gerardo:

@Yoon Ji if your net rental income is a loss: Lender looks at number of months rented and the lease and hits DTI with that loss. Often the first year has a large loss for repairs, advertising, and learning curve. Therefore in planning to apply for a full documentation loan losses hurt a borrower. Many new investors fail to get their taxes and application reviewed before they jump. They get a hard money loan and cannot refinance due to net losses on IRS taxes. Sure the losses offset w-2 income and maybe get a refund but they hurt in the conventional loan underwriting. Depreciation is the only line item loss added back to gross rents.

There are other types of loan products that don't use two year taxes averaged- bank statement loans, DSCR loans, asset depletion loans... Again preparing a year in advance and understanding your options is important to using loans as leverage to grow.

This is very helpful. Thank you Caroline.

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Albert Bui

Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ 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.

Credit unions have their own proprietary guidelines for their FTHB/first time buyer programs so they can arbitrarily make up guidelines that state upon move out of a primary we wont let you use rental income to offset the PITIA (monthly mortgage payment - principal/interest/taxes/insurance/assessments - PITIA) such that a borrower will have to qualify for not only the new property in full, but also the property they're vacating or leaving from at the same time.

On the west and east costs or higher cost metros in the US like los angeles, miami, seattle, Austin, or other areas this can be the kiss of death for a deal even if you make 250G's a year (20.8k a month X 50% DTI = max 10.4k mtg payment) because housing is so pricey that even most high income earners will max out at 1-2 properties if they dont strategically manage their DTI or debt to income.

In the OP's scenario above @Armando Montrond I would not touch my FHA mortgage since he says its at an absurdly low rate of 2.25%. If he were to use a 2nd FHA loan he'd subject to a series of rules that would be onerous (such as 25% equity requirement on the current fha property, and he needs to meet 1 of the 4 exceptions outlined by FHA to use a 2nd FHA loan simultaneously, and possibly the FHA 100 mile rule too).

Chances are, in the OP's position, its only been 1 year since he bought the triplex so hes not going to have 25% equity (from min 3.5% down FHA prior) probably.

If he uses conventional financing he can get 5% down on 1 unit property and 15% down on standard conventional 2 unit duplexes/properties. With conventional you Can use rental income offset upon moving out of the triplex (3 leases X 75% - monthly payment or PITIA). This is calculation offset could look like 5000 X 75% = 3375 - monthly 3900 PITIA = -525 per month negative. The impact of -525 from prior -3900 is a huge net improvement of borrowing power by nearly $420,000 more and now @Armando Montrond can potentially buy again.

@Matthew Kwan @Carlos Valencia

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Frustration/venting post any ideas about my situation with DTI

Frustration/venting post any ideas about my situation with DTI

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