Fannie DTI ratio with new rental income

12 Replies

Quick question regarding DTI for a Fannie loan.

As I understand that new rental income (less then 2 years) is calculated as:

Gross rent * 75% - DITI = income added 

What I don't know is whether or not the DITI still counts as a liability.

For example if DITI is 500 and rent is 1000, that nets 250 of income based on the above calculation. Does the $500 still count as a liability or is it completely wiped out?

Hope thatquestion makes sense. Thank you!

I am no pro in this space... but i did just have a conversation with my mortgage broker the other day about this very thing and he was telling me, that once YOU have a proven 2 years of rental income, in tax return form, you can now use any new (or old) rental income to help support your DTI.

I believe your DTI is calculated by adding all your Debt compared to all your income, so NO your debt is not completely wiped out in the calculation. but it will go down as a percentage if you include the new income.

Example Before

Debt $400

Income $4000

%10 DTI

Example After 

Debt now is $1000 a month

Income is now $5000

DTI is now %20 rather that %25 without the new income.

Hope this helps  ( I know it helps me to write this stuff out, I learn much more by writing, than reading) 

@Matt Holmer in your example, you consider the $500/mo debt against the $1000 a month income x .75% and come to the $250. Once you do that, the debt is already considered, so you won't be charged twice for it. 

In the calculation the mortgage is attached to the schedule of real estate, and it will have a net income or net loss to be added to your total debt to income ratio. So basically the mortgage is wiped out and you have $250 per month of income added to your other income sources.

But, like @Joshua D. says, once you have two years, you'll get all of the income shown on your schedule 3 and even get back some of your deductions if you have a good mortgage banker/broker.

In speaking with a fannie mortgage person, they said in this case the 1000*75% or 750 in rental income goes to the denominator and the 500 in expenses goes to the numerator making the DTI 500/750 or 66.7% (way above the 43% max). This seems ridiculous to me and I have no idea if she knew what she was talking about but I would like someone who understands fannie guidelines to confirm. Based on this, you would need to generate 3.1 x the expense to maintain your DTI at a level that will allow you to get additional properties. I have 2 years of tax returns as well so I wanted to confirm if they would go off that for a fannie loan and just add net liab to numerator or net income to denominator as others have mentioned in which case it would be easy to qualify for multiple properties.

https://www.biggerpockets.com/forums/49/topics/167101-calculating-dti-on-rental-mortgages

@Matt Holmer Per your example $750 is credited to you as income, while the $500 PITI shows on the debt side. So your debt is wiped out and in-fact your DTI goes down as you have +ve rental income.

Find a lender that will give your rental income credit immediately (with lease). Lenders that ask for seasoning are putting their own restrictions on top of what Fannie/Freddie asks for.

Upen Patel, Lender in (#National Lender NMLS 1374243)

Originally posted by @Upen Patel :

@Matt Holmer Per your example $750 is credited to you as income, while the $500 PITI shows on the debt side. So your debt is wiped out and in-fact your DTI goes down as you have +ve rental income.

 Not quite, my man. :)

If PITI is $500 and lease says $1000 (& $1000 is credible, etc), that's $250/month in qualifying income and *nothing* is entered on the debt side of DTI. Unless there are lender-specific overlays at work, that is.

Check out "Step 3" on this form from fanniemae.com dated 9/30/2014: https://www.fanniemae.com/content/guide_form/1038....

And I quote: 

"If the combined results of [rent*75%-PITI] is *positive*, add the positive amount to the borrower's monthly qualifying income. Because the PITIA expense was included in the calculations above, do NOT NOT NOT add it [PITIA expense] to the debt-to-income ratio."

YMMV, I always just use the numbers/procedures/etc directly from Fannie Mae, ignore our internal company forms/procedures/etc, and start yelling at people if our company's internal stuff is incorrect (this amounts to an overlay, I was recruited on the promise that this firm has no overlays, so that's my leg to stand on when I'm raising hell :P ). 

We can sell it on the secondary market as a FNMA loan using FNMA forms/guidelines and 100% disregarding our own forms/guidelines, even if our underwriters don't like being out of their comfort zone, which is why the yelling works.

Chris Mason, Lender in CA (#1220177) and California (#1220177)

I agree with Chris. You don't double count the PITIA. If you have net positive rental income (NRI) (R-PITIA=positive NRI) you increase your qualifying income from other sources by NRI.

If you have a net rental loss, you add that to the PITIA and count it as a liability (debt) payment.
And freakin' kudos to Chris for taking it to the u/w when they're wrong or too conservative!

@Joshua D. @Lee Liberman - relevant to both of you. Make sure your originator isn't adding anything to the numerator (debt) in your cash flow positive (according to FNMA's math) scenarios when qualifying you. Walk her or him through the above PDF step by step if needed. If rent*75%-PITI is a positive number, that's nothing but qualifying income ("nothing but net baby" is my pun that I like to use -- get it?).

You don't want your purchasing power limited by someone having learned a guideline 20 years ago that has since become obsolete and supplanted by current FNMA guidelines. 

EDIT: I'm also going to add that investors are kind of a niche type loan to be good at doing. Do NOT assume that your originator necessarily knows more about how to do investment property loans than you do. Be polite, but firm, and actually go through this if/when needed. You should be able to have a civil discussion, back and forth, citing guidelines, without anyone's ego getting in the way (hers/his OR yours), or you should fire her/him and pick a new originator - ideally one that knows their investor guidelines well so you don't HAVE to do the back-and-forth.

Chris Mason, Lender in CA (#1220177) and California (#1220177)

Originally posted by @David Miner :

And freakin' kudos to Chris for taking it to the u/w when they're wrong or too conservative!

 Thank you, sir! I actually have a very good relationship with our underwriters. They get thank you cards following all the yelling, when there is yelling, and our underwriting manager gal was at my wedding. :)

Chris Mason, Lender in CA (#1220177) and California (#1220177)

@Chris Mason I'm the same way. haha. I didn't think you actually "yelled" as much as you're not afraid to mix it up with them when needed. Too many loan officers are afraid to fight for their loans when they can.

@Chris Mason We are saying the same thing. I agree with you as to how the #s are handled on the loan paper work. What I stated is not double counting. Was presenting it in a simple form that might be easier for non-lender to digest.

Upen Patel, Lender in (#National Lender NMLS 1374243)

Originally posted by @Upen Patel :

@Chris M. @David Miner We are saying the same thing. I agree with you as to how the #s are handled on the loan paper work. What I stated is not double counting. Was presenting it in a simple form that might be easier for non-lender to digest.

These investor geeks sit here and look at cap rates and NOI and 2% rules and all that, all day, we can just tell them how the math works. :)

My favorite is when one of my silicon valley software engineer investor clients calculate their own DTI, PITI reserves, etc, and I just double check their math. Once I had a dude start basically (without realizing it) creating a loan origination software platform based on what I'd told him, haha. He was even including the CA homestead exemption in his property tax thing, which I generally don't bother doing.

Chris Mason, Lender in CA (#1220177) and California (#1220177)

Join the Largest Real Estate Investing Community

Basic membership is free, forever.