Lender Rules Re Mortgage-to-Income Ratio For Investors?

3 Replies

If lender's maximum desired ratio for borrower's mortgage payments to gross monthly income is 28%, how can a person with average income ever have a mortgage on more than one "average" property?

Income from investment property rents would need to be at least 3.6 times the mortgage payment for the 28% rule to allow an ongoing buy-rent-buy-rent business model, which of course isn't realistic.

It seems lenders must change the formula for people who buy properties to rent. Are there common lender guidelines, similar to the 28% rule, that can be useful when considering various investment scenarios?

We have one house that's been rented for a few years and are now looking at another that seems attractive. Making a feasibility study sheet has been very educational as so many questions are raised .

Any advice will be appreciated.

I'm not sure where you are getting the 28% of gross income debt ratio. Fannie Mae allows 50% and I believe that Freddie Mac does as well? 

Most rentals end up being debt neutral of very close to that. Once the formula is applied, if its a positive number, it adds to your income, if its a negative number, it adds to your debts. By that, I mean that the formula that the lending guidelines use goes like this:

Gross rents X .75% minus PITI.

  • Rents                                                                      $1000
  • X .75%                                                                        x.75
  • Rents after vacancy / maintenance factor         $750
  • Monthly PITI $700
  • Equals  Pos. or Negative cash flow                    +  $50

Thanks. I appreciate your example and patience with an obvious real-estate novice.

I got the 28% number when using a pre-qualification worksheet to organize my data. I guess its aimed toward primary and secondary residence mortgages and not related to investment properties. So far we haven't financed a property as an investment, only as a primary or secondary residence.

Text: "The 28/36 Rule states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service, including housing and other debt such as car loans."

Is there a worksheet specifically for investment mortgages, or do investors just take their information to a lender for a pre-qualification meeting? I was trying do as much homework as I reasonably could prior to meeting with lenders. Maybe I’m taking too much of a DIY approach when I should just go for it?

Originally posted by @Mike C. :

Thanks. I appreciate your example and patience with an obvious real-estate novice.

I got the 28% number when using a pre-qualification worksheet to organize my data. I guess its aimed toward primary and secondary residence mortgages and not related to investment properties. So far we haven't financed a property as an investment, only as a primary or secondary residence.

Text: "The 28/36 Rule states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service, including housing and other debt such as car loans."

Is there a worksheet specifically for investment mortgages, or do investors just take their information to a lender for a pre-qualification meeting? I was trying do as much homework as I reasonably could prior to meeting with lenders. Maybe I’m taking too much of a DIY approach when I should just go for it?

 As a lender you can have a full 20 year career and never understand rental income math for investment properties. If you read and understood @kevin r.'s post above, you now know something that the overwhelming majority of lenders do not know or understand. Find an investor friendly lender local to the real estate. :)

Chris Mason, Lender in CA (#1220177) and California (#1220177)
415-846-9211

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