San Bruno, CA · Member since 2016 · 5 posts · 0 votes
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!!
Lender · Denver, CO · Member since 2015 · 404 posts · 227 votes
9y
Allen Hua I would have to disagree with Jeff B. and say that yes, rental income can be counted when purchasing a rental property and therefore help your DTI by offsetting the PITI of that mortgage. When your lender orders the appraisal, they will order a special addition to ask the appraiser to determine market rents for the investment property. The market rents determined by the appraiser are what will be used as "rental income" and therefore boost the income side of your DTI. You will be able to use 75% of the gross monthly rents.
Lender · Denver, CO · Member since 2015 · 404 posts · 227 votes
9y
Allen Hua I would have to disagree with Jeff B. and say that yes, rental income can be counted when purchasing a rental property and therefore help your DTI by offsetting the PITI of that mortgage. When your lender orders the appraisal, they will order a special addition to ask the appraiser to determine market rents for the investment property. The market rents determined by the appraiser are what will be used as "rental income" and therefore boost the income side of your DTI. You will be able to use 75% of the gross monthly rents.
Investor · Littleton, CO · Member since 2017 · 66 posts · 39 votes
9y
@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.
Investor · Fort Pierce, FL · Member since 2016 · 47 posts · 16 votes
9y
Im currently going through pre-approval with my lender and had the same concerns. After expressing my concerns to them, they still think I will qualify. I have a rental that is 9 months old and additionally trying to count rental income for my next purchase. We'll see how it goes.
Let us know your experiences when you find a lender
-Brent
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!!
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.
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%.
Lender · Denver, CO · Member since 2015 · 404 posts · 227 votes
9y
@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.
Investor · Fort Pierce, FL · Member since 2016 · 47 posts · 16 votes
9y
Thanks for the post @Allen Hua, I misunderstood this previously. I believe my lender is giving 100% rental income of my current 9 month old property and 100% rental income of the new purchase rental. Other lenders did have overlays and would not work with me, make sure you find the ones that don't!
It's always nice having others chime in with their helpful information, but have the knowledge of 100% factual information from the source is always best. :)
In your case, as others have state, you will be able to take the Monthly Market Rent of minimum of 75% of potential income. Anything more would be lender specific so you would just have to search around for someone to give you more.
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 :)
Normally the the 1007 form is presented to an appraiser. So this is something that they would deal with more than say an underwriter. It is not an underwriters job to validate, confirm, or calculate what the potential rent would be. They are not capable of doing so as that is the appraiser's job. Their job is not to "guess" they want proof or the closest thing to it.
Normally the the 1007 form is presented to an appraiser. So this is something that they would deal with more than say an underwriter. It is not an underwriters job to validate, confirm, or calculate what the potential rent would be. They are not capable of doing so as that is the appraiser's job. Their job is not to "guess" they want proof or the closest thing to it.
Which is WHY I question adding income and debt service to a as yet non-exiting property. Good, the issue is on the head of the appraiser hired by the lender where the buyer has no recourse and we've all experienced lower than market values on purchase money notes.
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!