DTI Issue: House Hacked Rentals to Purchase SF Primary

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DTI Issue: House Hacked Rentals to Purchase SF Primary

Dillon O.
Member since 2023 · 2 posts · 0 votes

Looking for advice on how to navigate this unexpected scenario.

My wife and I own 2 duplexs we acquired with owner occupied financing and house hacked/fixed up. Both are in our personal name. Living in the 4th unit right now and renting out the other 3 (that we already lived in and fixed up). We would now like to purchase a single family home and rent out the 4th unit we currently occupy.

The issue is, the lendor I spoke with is saying our DTI is maxed out hindering us from qualifying for a SF primary mortgage. Im a bit confused by this as the numbers im running seem to pan out and shouldnt cap us.

Here is the math:

Property "A" (side by side duplex) valued at $580K with 38% equity (owe $360K) on a 30 year fixed conventional with 2.8% Int rate - PITI: $2800/ month. Monthly rents: $2200/ each unit = $4400/month.

Property B (side by side duplex) valued at $600,000 with 20% equity (owe $480K) on a 30 year fixed 3.5% int rate. - PITI: $3100/ month. We currently live in one unit and the other rents for $2300. Our owner occ. unit would rent for the same when we (ideally) move out after buying a single family. Total (future) rents =$4600/ month.

The issue is that the lendor I spoke with told me our DTI is too high to qualify for a conventional 30 yr. mortgage on a SF (approx $450K budget) approximate PITI: $3500/month

Our combined W2 wages are $145K/ year or $12K/month 

Total monthly debts: $450 (car pmt) + $180 (student loan) + $370 (fixed rate/term heloc on Property A) = $1000/month

Credit scores are: 780-800

Considering the debt services on the duplexs are completely covered and then some by 75% of the rental income I don't understand how we wouldn't qualify for financing a single family to use as a personal residence due to DTI. We would prefer not to refi/restructure the financing on the duplexs as we have great rates and doing so would put us in a less favorable financial position.

How do we move forward to get a mortgage on a single family? 

Any insight or help is greatly appreciated!

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

Does your lender provide the DTI calc to you? If not see if you can get them to send it over to understand the issue.

The broker I use sends me a spreadsheet with all my info so I can see 'how' he has input it, which would help in a situation like this. The issue seems like they are adding all your debts and all your income to get DTI. But for rentals it should be rental income minus rental debt, and then that is added to your total income or debt to evaluate DTI.

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  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    3y

    You are using the wrong lender.  Don’t let any more pull your credit until you find the right one…use the scores you just discovered and call around. You could call around to other landlords and ask if any are interested in selling with owner financing.  

    I have a number of owner financed deals from tired landlords, and it is such an amazing way to buy…and for each party.  No origination fee, no credit check; they get a lump sum and continued monthly income, plus the tax benefit to them of not getting all their income at the same time.  You already know it can be done vs “not possible in my market.” I recommend you send marketing pieces to those landlords who have held for over 5 years or who have multiple properties, offering to buy their houses at 6% interest only (or whatever numbers fit your parameters).  

    PropStream would enable you do to this if your local county recorder/assessor does not have robust data.

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

    Does your lender provide the DTI calc to you? If not see if you can get them to send it over to understand the issue.

    The broker I use sends me a spreadsheet with all my info so I can see 'how' he has input it, which would help in a situation like this. The issue seems like they are adding all your debts and all your income to get DTI. But for rentals it should be rental income minus rental debt, and then that is added to your total income or debt to evaluate DTI.

    1Reply
  • Dillon O.
    OP
    Member since 2023 · 2 posts · 0 votes
    3y
    Quote from @Matt Devincenzo:

    Does your lender provide the DTI calc to you? If not see if you can get them to send it over to understand the issue.

    The broker I use sends me a spreadsheet with all my info so I can see 'how' he has input it, which would help in a situation like this. The issue seems like they are adding all your debts and all your income to get DTI. But for rentals it should be rental income minus rental debt, and then that is added to your total income or debt to evaluate DTI.


     Thank you! This prompted more research on my end and subsequently found a Fannie Mae form to plug numbers into. Seems this might work out after all pending a lender doing the same math I'm putting together.

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  • Doug Smith
    Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
    3y

    Math is not your friend when it comes to multiple rental properties and Fannie/Freddie loans. There is a form that Fannie Uses for self-employed borrowers called a 1084. I'll look at see if I have it on my computer after I type this and if I can find it, I'll attach it, but you can Google if it you need to. It's likely not going to help you as different lenders use different variables in their income calculations for such things as "vacancy factors" and assumed management fees when calculating rent, but here's the math issue I mentioned before. These numbers will be silly, but hang with me. I'm trying to illustrate a point. Let's say you make $1000 per month. Let's also say your current debt payments including your mortage, real estate taxes, homeowner's insurance, your car payment, etc come to $430. $430/$1000 = a 43% debt to income ratio. That qualifies. Now, let's say you find a nice rental property that will generate $1000 and positively cash flow by $200 with payments of only $800 (PITI). Now let's redo the calculation. ($430 in old payments + $800 in new payments)/($1000 current income + $1000 in new rental income) = 61.5% DTI...you no longer qualify. The math is rough with how Fannie & Freddie calculate DTI. That's one reason DSCR deals have become all the rage. Keep in mind that banks don't necessarily like to lend to small investors, so their guidelines and overlays are quite heavy-handed with respect to what they credit you for for income. Without seeing the exact way they calculated it, I can't say for certain, but I'll bet you they are more conservative with what they credit you for than non-bank lenders would be. I wish you well in your endeavor.

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  • Brittany MinocchiBusiness Member
    Lender · Massillon, OH · Member since 2022 · 1k+ posts · 486 votes
    3y

    Not sure if this is factoring into your numbers (I didn't see it mentioned but may have missed it)….if you've owned the properties for less than a year (or overall have less than a year of property management experience) you're limited to using the income not exceeding the PITI of your new property. So, any income you get that exceeds the new $3500 mortgage is a wash. It doesn't get added onto your gross income.

    There are loan programs for owner occupied properties that don't require income or employment documentation, similarly to a DSCR loan which cannot be used on a primary residence, but they require a higher credit score than conventional/FHA. You wouldn't have a problem with that part judging by your posted scores. It also requires a pretty large down payment of 20-35% depending on credit.

    [email protected]330-354-6590
    Brittany Minocchi - Barrett Financial Group, LLC522 Reviews
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  • Jamie Jones
    Lender · Nashville, TN · Member since 2017 · 205 posts · 107 votes
    3y

    Hi @Dillon O., I'd love to chat about your scenario and see if I could help you get into a home. I own multiple rentals and am also a mortgage advisor. One factor to consider is how long you have owned the rentals. Assuming more than a year, most conventional lenders are going to look at the Schedule E on your personal tax returns, which shows your total gross rental income and all the expenses for that year. That is how they calculate rental income/loss. In regards to departing unit you will be moving out of, we could use 75% of a signed lease agreement to help offset any PITI payment. Hope this helps!

    0Reply
  • Jim Kinzeler
    Member since 2023 · 7 posts · 0 votes
    3y
    Quote from @Matt Devincenzo:

    Does your lender provide the DTI calc to you? If not see if you can get them to send it over to understand the issue.

    The broker I use sends me a spreadsheet with all my info so I can see 'how' he has input it, which would help in a situation like this. The issue seems like they are adding all your debts and all your income to get DTI. But for rentals it should be rental income minus rental debt, and then that is added to your total income or debt to evaluate DTI.

    can you give me your lender name and contact info?  I've lost out on loans abt 12 times in the past 8 yrs due to inept lenders and currently need a good CA lender.   (I've also received abt 6-7 loans(sold most of those properties now)
    0Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    3y

    @Jim Kinzeler I use @Chris Mason for my loans. He is great at actually knowing the guidelines, and knowing when to use lender A vs. lender B based on the specific scenario you're getting a loan for.

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  • Jim Kinzeler
    Member since 2023 · 7 posts · 0 votes
    3y
    Do you do loans in FL, CA, SC or NC?    I finally realized that the vast majority of lenders can't do rental income. I get the 1003 from them and they've given me triple income on some properties and 0 income on others when all properties were full and cash flowing for 10 years.      Quote from @Charles Lomolino III:

    @Dillon Onsager Based on the info you provided you should have no problem qualifying for the loan. The rental income we can use for the loan is based on the schedule E on your tax return. I doubt the deductions are high enough to affect your DTI. It seems like the file may be too complicated for your lender. I am happy to take a look for you.

    Zillow Reviews - https://www.zillow.com/mortgage/lender-review/?screenName=Charles%20Lomolino%20III






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