DTI ratio too high because I haven't had my rental properties for 2 years?

21 Replies

This summer I bought 2 rental properties cash, which are all rented and earning a good amount of income. I am now tapped out cash wise and would like to finance an additional rental property. A LO told me that because I could not show 2 years of rental income that rental income would not be counted, leaving my DTI ratio high because It looks like I am paying for the house from my annual salary (which i am not). Because my DTI ratio is high I do not qualify for alot of freddie mac and fannie mae type loans. Is there a way around this? If I transfer my current properties that are loan free into a LLC will this help? I am 27 still live with my parents have no current morgages, own 2 properties, 770 credit score and have been at my job for 8 years? I didn't think getting a loan would be so difficult. Does anyone have any suggestions? or do I just have the wrong loan officer? Is it easier/ smarter to just use the equity out of my rental properties?

They could care less about who OWNS the properties.  It is all about who FINANCED the properties.  You could quit claim them to Ronald McDonald for all they care.  You still have the mortgage.  I am in a similar situation but still able to get financing due to my relatively high income.  First, call around.  

It is all based on how each loan officer or company calculates your income.  If they are lazy or ultra conservative, they will take the easy way out and show rental income based on last tax return.  If they don't mind advocating for you somewhat, they will push to include recent purchases as long as it can be supported by past tax returns.  

Worst case, wait a few months and file taxes.  Then, when you can show the income from 2014, that will bolster your case and they can add back things like depreciation and home office to offset your loss somewhat.  If you are super aggressive in your tax filing and show significant losses, then you may be faced with a decrease in borrowing ability.  There was a recent blog about this.  I am fairly aggressive with my deductions but typically still show a decent profit.  

Your other alternative would be to go to an institutional lender vs one that will sell the note on the open market.  If they keep their loans in house, they have more flexibility in their underwriting.  Word of caution though....flexibility is not free.  You will pay higher rates and fees for these loans.

Go talk to a different LO the information about the underwriting here is not exactly on track.

The rental you purchased and then rented out should be off set with 75% of the gross rents.  So 25% of the gross rents is always carried by your income.

The two year rule is related to using the income you earned from the rental in addition to the income you already have from a job or other investments.  

Moral of the story, if the investment property is rented out, you are in fact carrying two full mortgage obligations (new loan applying for and existing investment loan) one loan is offset by the renter in place.  There is no time rule to use the rental income as an offset.  

Two different ideas.  Sounds like they are being merged a little bit.  

Additionally, one investment property with a renter could be mitigated in most cases since the bottom line liability is not the full PITI. Most of the time you could just put some more money down and the DTI will fall in line.

I would get a couple more opinions, from the post the LO sounds like he maybe setting up your application wrong and thus all submissions will come back as rejections.  

What extremely large outstanding debt do you have?.. You said you purchased those 2 properties for cash, so I take this as you don’t have a mortgage on them, correct?

If this is the case, why don’t you look into pulling some equity out of them if you want to acquire more properties.

@Chris Simmons  

I do not have a mortgage on any of these properties. I do not have any mortgages period, I live with my parents. My LO told me that new FHA rules say they must be rented for 2 years so filing this years tax return would not matter. I have only had the properties since july

@Jeff S.  

Because I am paying for the 2 properties from my annual salary (they included taxes, insurance and Hoa) verse my annual Salary. Then they include the 3rd property that i am trying to purchase.

Ok....so it gets real simple.  

You have no mortgage debt.  Rentals are paid for with cash and you live and home with mommy and daddy.  Unless you just have way too much personal debt with you credit cards, car loans, student loans etc....then the only other issue is that your income is too low. 

If you don't have much debt, the only way your DTI ratio can be out of wack is if your income is too low. Do you have much income outside of your rentals? Do you have lending options besides FHA?

As a commercial loan officer I will tell you this.  Lenders will always look at a borrowers ability to service debt first before ever considering collateral.  Even for CD secured loans.  If you can't show that you can pay the loan back, making the loan based on collateral is a waste of time and potential risk since there are procedural errors that can cause collateral tied to a bad loan to improperly get released.  Just walking into a place without sufficient income but some amount of collateral won't get you very far.

@Dion DePaoli  

thank you for the advise. I was not to confident in what he was telling me that is why I came to BP and im glad i did. But the 2 properties I own do not have a mortgage I paid cash does that change anything? there is no mortgage to off set?

@Garett H.  

I have no outstanding debt, student loans are all paid off, no car loan, no morgage, only credit cards totaling $900.

I was not going to try and take the equity out of the homes I own because I was told I could get a better rate just getting a regular loan? Do you know if this is true? plus i was trying to save that for when I am ready to do a flip and need the cash.

Originally posted by @Chudney Wesley :

@Dion DePaoli 

thank you for the advise. I was not to confident in what he was telling me that is why I came to BP and im glad i did. But the 2 properties I own do not have a mortgage I paid cash does that change anything? there is no mortgage to off set?


Yes, that is a bigger fowl on the LO's part, LOL.  The only obligation you have to offset is the taxes and insurance which presumably is covered with with 75% of gross rents.  Now bear in mind, the excess cash flow will NOT be able to be credited to your  income.  So as long as you have another source of income and that income can essentially support the demands of the new loan you are applying for, I don't see what the issue would be.  

That does make a little more sense, in defense of the LO, on where the confusion is coming from.  I would bet he setup the real estate schedule on the application wrong or didn't set it up at all and thus he is getting denials.  

I don't think I would spend too much time trying to correct his application.  I would just apply with another one or two LO's and see what comes back.  In advance, when shopping for loans your FICO does not take the negative hits that some might suggest.  The credit bureaus expect consumers to be shop and as such a couple of different initial inquires will not grossly affect your credit.  Moral of the story, always shop.

@Chris Simmons  

I guess they are saying that my income 43,000 is not enough to support all 3 houses. The 2 house that i own (taxes Hoa and insurance) and the 3rd house that I am trying to buy (mortgage, taxes, HOA, Insurance) I live in nj so the taxes are pretty high. He was able to find me a loan but only because I have 60K in the bank to back the loan? but i don't want to have this problem in the future. I don't want to have to wait 2 years to purchase another property.

@Dion DePaoli  

once again thanks for your advice I will definatley continue to shop around. I have a meeting with a local bank later today so hopefully they will be able to come up with some better options. This loan officer was saying that I would need to be able to support all 3 house including the new house that I am trying to buy off of my income alone. Which is where my DTI ratio would be high ( I live in NJ so our property taxes are sky high)

As others has mentioned, your situation is not adding up unless your salary income is relatively low compared to your property taxes, insurance, etc. But let's just assume the LO is right and your DTI is right. I had the same exact issues: 23, no personal debt, live at home, salary job. I financed three properties and now no big bank will give me any more money because I have only owned the properties for less than a year. I'm now in the process of closing on my fourth. It was so easy, I called a mortgage broker and they used their brains to calculate my true DTI without all the Fannie and Freddie rules. He found some small local bank for me. Good terms too: 30 year amort, 20% down, 4.75% rate. I did spend about a month personally calling on local banks and I found a handful that could help but they wanted 30% down and 20 year amort. I know the situation you're in and you really just have to hit the pavement and look.

Also, I’m not sure what your long term goal is but it looks like you have a great opportunity to leverage the two properties you own 100% for some cash. It could be easier to cash out refinance the two and buy one more with cash. A bank will be more likely to lend on a property that is already owned and making money.

Hi @Chudney Wesley  and welcome to BP from another Southern NJ investor. Another option you may wish to employ is to find a bank willing to give you a line of credit against your homes. I have done this in the past and been able to get rates as low as 4.x %. 

Good luck.

@Paul Garcia 

I am glad that you  have found a solution and it is good to know that it is possible. I have a meeting with a local bank today so hopefully they can help me.  If not i guess i will be shopping for another. And yes eventually i was going to cash out on my properties that I have now but I was waiting on when I find the right flip and then using the money towards the flip.

@Jon Lafferty  

that is great, can I ask what banks you used?

Just to clean up something I mentioned above.  I would have to check with an underwriter (been a minute since I retailed a loan) but actually in this setting with 2 free and clear properties with renters the two properties would not even need to be entered on to the application.  I believe as well, that reserve requirements for those two properties would also be negated.  

The general idea is the cash flow more than supports the property and on-going maintenance.   So there is no need to draw it into the liabilities for the Borrower.  This is only because those properties are free and clear.  If they had mortgages against them, then it all must be reported on application.  A borrower's duty on application is to report liabilities for evaluation.  Assets can be reported at the Borrower's discretion. 

So the net effect of those properties should be zero.  Like I said, I am guessing the LO has the application setup wrong and as such he is getting denials.   

In order to use the net rental income as supporting income for the Borrower in the future is where we get the 2 year rule.  The rule can be manually underwritten at the discretion of the Lender or some portfolio lenders may not have the rule.  

@Dion DePaoli  

ok that sounds about rite. This was my first time dealing with him and this was also the first time I was asked to report the taxes & etc. on other free and clear properties to quailfy for a loan. I will continue to shop around.

@Chudney Wesley

Basically one quick way to check your DTI on your own is to divide your monthly debt services (car payment, property taxes, insurance, rent, child support, student loans, etc..) by your monthly take home pay (not including your rentals since you haven't had them for 2+ years)

Alternatively, take your monthly take home * 40% then subtract your monthly debt services. This leaves you with the remaining dollar figure until you reach the 40% threshold. So your new mortgage, property taxes, insurance, interest would need to be less than this number.

@Chudney Wesley  

You need 2 years of history to do a loan with Freddie Mac but you don't need any history to do a loan with Fannie Mae. Your LO either has OVERLAYS (Bank guidelines on top of what Fannie requires) or he/she just doesn't know about this.

From what you're saying you shouldn't have any problem qualifying for a loan. So as long as the properties are appraise for what you need you're good to go.

Find an LO that is experienced in this area and you will be able to get your cash out in less than 30 days.

I hope this helps and have a great day.

@Shaun Weekes  

thanks I believe the loan he was trying to get me was freddie mac. I can't remember why we didn't go fannie mae exactly but im sure its because he thought I didn't qualify.

@Chudney Wesley  my best advice would be to do a cash out refinance on these properties. You can use 75 percent Of the income that you are currently receiving as they are not on your taxes yet. They can also consider 75 percent of the potential rental income for the third property. The equity that you pull out on the first two properties will hopefully be enough for a down payment for you to purchase two more! 

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