Does DTI ratio consider potential rental income?

Question

hi folks,

I'm looking to purchase an investment property. When applying for the loan, does the debt-to-income ratio include the potential rental income on the property I'm trying to buy (that property is currently not rented out). This would make a big difference on my DTI.  Thanks in advance!!

Chris Mason · Answer

Rental income is mortgage qualifying income. It's considered. If you are buying good cashflow positive real estate, and the lender is doing the math correctly (most don't), your DTI will actually improve the more rental properties you buy. I just ran a scenario this afternoon where DTI was 54% by default (too high to qualify), but 25% with the rental income counted correctly. She'd been told "no" by the previous 3 lenders she spoke with.

Jared Bouzek · Answer

@Terry Lao I'm sorry to be contradictory again, but there is no requirement within Fannie Mae or Freddie Mac guidelines for a person to have 2 years of landlord experience. You also won't find any requirement for tenants to be in place with lease agreements. Both of those things are overlays on the Conventional guidelines or simply a lack of understanding of the guidelines by the loan officer.

@Allen Hua You live relatively close to @Chris Mason who commented above. He would be an excellent connection for you, and I know he would be able to use your rents as qualifying income without landlord experience.

Jay Jasunas · Answer

@Allen Hua I agree with Jared Bouzek, you will be able to you use a portion of the future rental income to offset DTI. Not sure if all brokers/banks ask but I always say I have experience in rentals and a track record in renting them out. Good luck.

Jeff B. · Answer

@Jared Bouzek, @Nicholas Covington

Good to have factual reporting :)  I find it hard to see an underwriter on a loan for a first time rental attempting to work through what is basically proforma data to guess the new rents and then working through the price - down payment to get the loan amt and the payments for this loan.  In my mind, pre-existing rentals are easy to understand and reliably get the contributions to DTI.

You both have better credentials than I in this field, so I will bow to you :)

Chris Mason · Answer

That's an overlay. Fannie has no such requirement.

Terry Lao · Answer

@Allen Hua

Here's the answer, 100% correct, and I've been there done that. If you are buying 1-4 units multi-family, fannie mae/freddic mac underwriting, they will consider 75% rental income with documented lease agreements in place, and actual tenants in place. However, that is only if you have 2 years landlord experience on your federal income tax return, which is a schedule E (rents/royalties).

A way around that is to purchase with wife with W2 income or partner with someone who has good debit ratios, or no mortgage payments. Once two years has passed, and you file two years tax returns with schedule E, then any future property purchased can use 75% of rental income.

From actual experience, with 2 years landlord experience, a good 4plex with cashflows, with using 75% of lease agreements will net you $100-200 positive income. That 100-200 will be added to your income. My debt ratio with my owner occupied house payment is about 35%. With rental income on my 2 4plexes, my debit ratio is lowered to about 33%.

I am trying to buy my 3rd 4plex, and with 75% of lease agreements, I anticipate my total debt ratio to be lower than 33%.

Terry Lao

Jeff Quiring · Answer

I’m very curious about using rental income to help my DTI. My current situation is, my wife and I gross $9,250 a month combined. FICO scores are 740+ for both of us. We have a mortgage on our primary. Our DTI is about 25%. We plan to purchase a new home to be our new primary residence, and rent out the home that we are currently living in. We have 5% to put down on the new home, which we plan to secure a conventional loan on as it will be our new primary residence. Here are my questions and I really appreciate any insight you can provide!1.) Since I've never owned a rental, and have no proof on my tax returns or experience, is there a waiting period of say 1-2yrs after renting out my first property and reporting the rental income on my taxes before I can use the predicted rents to help my DTI? How does this all work?2.) What do banks require as proof for all of this? Will I need to have my current house rented out with a lease signed and in place before I secure financing for buying my new primary residence? (In order to have the rental income count towards our DTI)Thank you so so much for helping us. I really appreciate it!

Eric C. · Answer

I would love to speak with someone about this for a property in TN

Does DTI ratio consider potential rental income?

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