75% of monthly rent is added as debt?

14 Replies

I own one rental house. I owe 60k on it and it rents for 675/MO. My husband owns our primary residence. We owe 125k and it is valued at 170k. We applied for a 40K HELOC to finance our next rental under that house. My husband dealt with the entire process and just plugged my information in for me. When they ran the numbers on my end, they told him that my debt to income was too high because of my rental because not only does my 60k loan get figured into my debt but also 75% of my monthly rent is added into my debt. I have tried getting him to explain this to me more because it doesn't make any sense to me. I keep thinking that there much be something that we are missing. I understand not counting 100% of rent as income due to potential vacancies and repairs. However, how it comes out, they are essentially counting 100% or more of my investment as debt. We ended up securing the financing by removing my name from the application. However, now I am left wondering how, under those conditions, we continue to build, if 75% of every investment is considered debt... on top of the loan used to finance it? Does this sound correct? Is there something that either he or I is missing? Perhaps this particular lender just has very tough conditions? I was hoping someone could explain this rule and their experience with it?

I have had a similar experience with some banks.  Their explanation was that the loans were too new and that I hadn't owned them long enough to demonstrate my ability to manage them appropriately.  This was bogus of course the rentals (7) were from purchases from 2003 to 2005 so when is 9 to 11 years not sufficient time to demonstrate an ability to manage them.  No late payments EVER.  They all cashflow and have from the day of purchase.  Telling them they were professionally managed didn't weigh positive at all.

75% of the rent is counted as Income,  generally if it's been on 2 tax returns.  Hubby said it wrong.

Is it possible that your husband got confused? Around here, I'm finding that banks will only count 75% of the monthly received rents towards offsetting my monthly payment.

Originally posted by @Martin Scherer :

I have had a similar experience with some banks.  Their explanation was that the loans were too new and that I hadn't owned them long enough to demonstrate my ability to manage them appropriately.  This was bogus of course the rentals (7) were from purchases from 2003 to 2005 so when is 9 to 11 years not sufficient time to demonstrate an ability to manage them.  No late payments EVER.  They all cashflow and have from the day of purchase.  Telling them they were professionally managed didn't weigh positive at all.

 Martin, I have only owned the property for a couple years so perhaps that could be my issue. Maybe another lender will have more favorable requirements? 

Originally posted by @Wayne Brooks :

75% of the rent is counted as Income,  generally if it's been on 2 tax returns.  Hubby said it wrong.

 Wayne, if they only counted 75% of rent as income that would make so much more sense to me. I actually suggested that this might have been what was said. He said that was not what he was told. He may have misheard or the lender didn't relay the information properly. I probably just need to call the bank and ask for an explanation directly. 

As others have stated the lender is going to allow 75% of the rent towards your income which is pretty standard across the board. That is also dependent upon the fact that you have a 2 year history as a landlord. Perhaps a portfolio lender is a better fit in your situation.

I think my debt to income ratio is 22. 

I'm curious, what percentage of rent is normally counted for properties with less then a 2-year history?  Or is it the history of the borrower as a landlord (and not the property) that counts?

Only 75% of the rent is considered as income because there is a 25% Vacancy Factor applied.

Account Closed 

75% of the rent is counted as income for the first year you own the property, before it shows up on your schedule E of the tax returns.  After that first year they look at what is being claimed on the schedule E.  Freddie Mac requires a 2 year history of owning rental property's, Fannie Mae does not.

Agree with @Joe Impagliazzo  

My experience has been only the first year, after that whatever you claim on your schedule E banks will look at it...

Is it possible that your claiming only 75% of received rents for whatever reason!?


Flavio

@Flavio Zanetti  Account Closed 

Another issue will be if they are showing a loss because they had a good CPA. If that's the case you have to hit them for that loss broken down monthly, however you still can omit the mortgage since it is being factored in on the Sch. E. Also, if the monthly loss is more than the mortgage payment, you can just hit the DTI for the payment amount.

Account Closed said.  If the bank is not willing to count the rents as income, with proper rental records/receipts provided, another bank will.  Find a bank that will wash the rental property debt with the rental income.  They are factoring out capital expenditures to get that 75% number so if the 675 a month rent x .75 = $506 covers the 60k debt service, taxes and insurance , which it absolutely should, then that debt should not be counted against you.

Here's the one thing I would say. The bank is definitely not counting 75% of the rent towards your debt. That would make no sense. And, actually, if they really are doing that, I'd call em out on it. They're simply wrong.

Typically I hear 70% of the rent for new properties myself but you can't count rent as debt. Thats just stupid. But keep in mind that some of these underwriters simply have no idea how to handle investment property income either.

They may have read something in the fannie mae guideline and simply not understood it correctly and misapplied the rule. Again. If they're telling you that 75% of your rent is being counted as debt AND so is the PITI, then they're wrong and you need to call them on it.

I am going through a refi right now where the bank counted my PITI against me AND then they took the net profit of my tax return. They declined me. When they did and told me why, I was able to find out how they were calculating the DTI and realized the problem.

Basically, if I'm paying 800/mo in PITI and my rent is 1,300, then my gross profit is 500/mo. The bank is either supposed to take 70% of my rent (or 910/mo) and offset that against the PITI. Or they're supposed to take my actual net profit on the property based on the tax return.

Instead the bank was taking the PITI and trying to offset that against the net profit from the return. Well, the net profit in the return has already deducted the ITI (interst, taxes and insurance - but not principal) so they were essentially counting the PITI against me twice. :-)

Once I explained that to them, it all clicked, and now we're back on track. 

But don't always assume the bank is right on some of these things. Its not easy stuff they're dealing with and sometimes, they just don't see investor files come through often enough to know where all the numbers should come from and/or go.

If the numbers don't make sense to you, they may be wrong. And clearly adding 75% of the rent TO your debt doesn't make sense.  Rent is income not debt. :-)

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