How long before lenders count rent income towards DTI ratios?

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How long before lenders count rent income towards DTI ratios?

Matt F.
Investor · Lancaster, PA · Member since 2016 · 68 posts · 12 votes

How long does it generally take before lenders start counting your rental income ?

i recently purchased a new primary residence and rent my original home. how long do i need to be renting that original home for before lenders start letting that income count towards ratios like debit to income ?  Do they count this income at full value or do the discount it since its not guaranteed ? 

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Brie SchmidtBusiness Member
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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
10y
Originally posted by @Matt F.:

How long does it generally take before lenders start counting your rental income ?

i recently purchased a new primary residence and rent my original home. how long do i need to be renting that original home for before lenders start letting that income count towards ratios like debit to income ?  Do they count this income at full value or do the discount it since its not guaranteed ? 

 It depends on who they are selling it to.  Some will make you wait two years and others can count it immediately (more common)  

For the first year they do 75% of monthly rents - PITI = monthly income or loss

After that they go off what you reported on your schedule E. Gross rents less expenses, add back in interest, insurance, taxes, depreciation (divide by 12) and then minus PITI

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    10y
    Originally posted by @Matt F.:

    How long does it generally take before lenders start counting your rental income ?

    i recently purchased a new primary residence and rent my original home. how long do i need to be renting that original home for before lenders start letting that income count towards ratios like debit to income ?  Do they count this income at full value or do the discount it since its not guaranteed ? 

     It depends on who they are selling it to.  Some will make you wait two years and others can count it immediately (more common)  

    For the first year they do 75% of monthly rents - PITI = monthly income or loss

    After that they go off what you reported on your schedule E. Gross rents less expenses, add back in interest, insurance, taxes, depreciation (divide by 12) and then minus PITI

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    WebsiteView Page
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  • Brendan H.
    Real Estate Agent · Denver, CO · Member since 2015 · 125 posts · 43 votes
    10y
    Agreed with Brie Schmidt . I've seen 12 months in some instances, but every bank is different. My recommendation is to call 20 banks and ask what their policy is. Make a spreadsheet to track & keep tight notes bc you can always circle back around to them for a different loan you may need some day. Typical banks that hold portfolio loans are willing to move more quickly with less seasoning bc they are (usually) local & will look more closely at the value of the property as opposed to straight debt to income ratios. Check out BP Ep 55 - some solid insight on procuring financing from a commercial underwriter. Most importantly...Do Not Give Up until you find the bank that will loan on that property!! Good luck!!
    1Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    10y

    @Matt F.

    If the bank you're dealing with has no OVERLAYS, then it's 1 day. For conventional they will use 75% and for FHA they will use 85% of the lease agreement towards your income.

    I wrote a blog about this over 2 years ago if you want to look it up Sir.

    I hope this helps and have a great day.

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  • Matt F.
    OP
    Investor · Lancaster, PA · Member since 2016 · 68 posts · 12 votes
    10y

    thanks everyone , appreciate the replies and insight. so properties that don't really cashflow much, don't do much for you in terms helping your qualify for additional loans? i was thinking that a strong rental history would show that that properties loan as basically covered so wouldn't be counted toward debt to income ratios. 

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  • Chris MasonPro Member
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    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y
    Originally posted by @Matt F.:

    thanks everyone , appreciate the replies and insight. so properties that don't really cashflow much, don't do much for you in terms helping your qualify for additional loans? i was thinking that a strong rental history would show that that properties loan as basically covered so wouldn't be counted toward debt to income ratios. 

     That's correct, it needs to be cash flow positive according to our underwriting math for it to help your DTI.

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  • Justin Young
    Investor · Honolulu, HI · Member since 2016 · 362 posts · 93 votes
    10y

    Great question @Matt F. I asked something similar the other day. Although I was unaware that some banks/lenders may actually count your rental income earlier than 2 years. Thanks for this post.

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  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    10y
    One of my criteria in screening properties is that the rent*75%>PITI. Most decent properties hit this anyway, but it's certainly something I measure as part of the evaluation.
    2Reply
  • Matt F.
    OP
    Investor · Lancaster, PA · Member since 2016 · 68 posts · 12 votes
    10y
    Originally posted by @Dan Schwartz:

    One of my criteria in screening properties is that the rent*75%>PITI. Most decent properties hit this anyway, but it's certainly something I measure as part of the evaluation.

    maybe i haven't don't enough reading yet but i don't think i've heard of this screening tool before, so thank you. if i am following this correct, your basically saying look for places where 75% of the rent, is still greater than the PITI on the property. this leaves the remaining 25% for other expenses and then the rest is cashflow?

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  • Brendan H.
    Real Estate Agent · Denver, CO · Member since 2015 · 125 posts · 43 votes
    10y
    Matt F. That is correct! Use that .75xPITI math as a typical rule of thumb for how a bank will consider that property re: your DTI ratio. As an aside, for your own calc's on calculating the cashflow of a deal, don't forget to include CapEx as you'll eventually need to use it (even if the bank doesn't make you consider it).
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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y
    Originally posted by @Matt F.:
    Originally posted by @Dan Schwartz:

    One of my criteria in screening properties is that the rent*75%>PITI. Most decent properties hit this anyway, but it's certainly something I measure as part of the evaluation.

    maybe i haven't don't enough reading yet but i don't think i've heard of this screening tool before, so thank you. if i am following this correct, your basically saying look for places where 75% of the rent, is still greater than the PITI on the property. this leaves the remaining 25% for other expenses and then the rest is cashflow?

     Keep in mind that lenders are going to use the lesser of current leases in place (if applicable) or appraised market rents. Vacant units, we just go off of the appraisal. 

    All using this as purchase criteria will let you know is that you will not have DTI issues introduced by the acquisition of the property in question.

    This is in part how wheelers and dealers can keep acquiring properties with no loan contingency. If you just got a mortgage last month, and both that property and this next one follow the rent * 75% - PITI(A) rule, it's not too crazy to write offers with no loan contingency (assuming you didn't finance the purchase of a new Corvette, etc, in between).

    Speaking of DTI issues: If it's a BRRRRRRrrrrrrrrrrr, make sure when you do your taxes that you report renovation costs on line 19 of schedule e, not line 14, in the form of a "See Statement 1" that lines up line-by-line 100% with invoices or receipts that you keep. If you put it on line 14, an underwriter might default to assuming that these are recurring (not one time) expenses, which could trash your DTI.

    2Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    10y
    Matt F. It's not anything special, and I'm not surely it's widely mentioned. A D-class property would almost-certainly pass the screen, so it's not necessarily a screen for quality. It's as Chris M. said: solely a tool to make sure you can turn around and start financing the next property the next day. We don't move anywhere near that quickly, but since we finance each property on one income at a time only, it's important that no property negatively impact DTI.
    0Reply
  • Juan Abreu
    Houston, TX · Member since 2019 · 21 posts · 4 votes
    6y

    Sorry to jump back on this thread after so long. 

    I'm currently house hacking my 3/2 house. I live in one room and rent the other 2 out (have leases and everything) but my tenants only cover about 85% of my PITI. Based on what you guys say here, this would not help offset my future DTI at all? @Chris Mason @Shaun Weekes @Dan Schwartz 

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  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    6y
    Originally posted by @Juan Abreu:

    Sorry to jump back on this thread after so long. 

    I'm currently house hacking my 3/2 house. I live in one room and rent the other 2 out (have leases and everything) but my tenants only cover about 85% of my PITI. Based on what you guys say here, this would not help offset my future DTI at all? @Chris Mason @Shaun Weekes @Dan Schwartz 

     Your jobs income will offset the rest.  Plus when you move out your room will be rented for additional income which will help even more.

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