Does HML count against your personal DTI?

15 Replies

Hello all,

Not sure if this should go into Personal Finance or not. Anyway, question is as stated - does your hard money loan count negatively towards your DTI ratio? I am wondering specifically in the context of if you're trying to qualify for a mortgage/loan/etc from a bank type of institution? I thought I had heard that Hard Money will not show up on your personal credit...however, that doesn't mean it still won't be considered as personal debt? I would guess it also matters if it's a non-recourse loan or not.

I ask bc it most definitely popped up on my recent cash out refi of a rental property. This may be a very dumb and obvious question, but I would still love the clarity for future reference. Thank you. 

@Tae C. Depends if the HML reports it to the credit bureaus. That said, even if not on your credit report, the payments would come up on your bank statements, tax returns, personal financial statement, etc.

I have a number of commercial loans and owner finance loans that aren't on my credit, but of course they are on the above statements if applying for a loan.

Hope that helps,

- Tom

Originally posted by @Tae C. :

Hello all,

Not sure if this should go into Personal Finance or not. Anyway, question is as stated - does your hard money loan count negatively towards your DTI ratio? I am wondering specifically in the context of if you're trying to qualify for a mortgage/loan/etc from a bank type of institution? I thought I had heard that Hard Money will not show up on your personal credit...however, that doesn't mean it still won't be considered as personal debt? I would guess it also matters if it's a non-recourse loan or not.

I ask bc it most definitely popped up on my recent cash out refi of a rental property. This may be a very dumb and obvious question, but I would still love the clarity for future reference. Thank you. 

 Yup, it counts.

If you theoretically had a hard money lender that did NOT secure it by the real estate and record it with the county you MIGHT be able to sneak it through, but such a hypothetical hard money lender would probably be out of business in about 0.236 seconds.

If the HML doesn't report to credit bureaus can you use the HML and do delayed financing (without the traditional seasoning)?

Originally posted by @Matt K. :

If the HML doesn't report to credit bureaus can you use the HML and do delayed financing (without the traditional seasoning)?

Hi Matt,

It wouldn't change anything if it was, or wasn't, on the credit report. 

You can do something like this and secure it by other real estate, however, and then it's a true cash purchase.

Originally posted by @Chris Mason :
Originally posted by @Matt K.:

If the HML doesn't report to credit bureaus can you use the HML and do delayed financing (without the traditional seasoning)?

Hi Matt,

It wouldn't change anything if it was, or wasn't, on the credit report. 

You can do something like this and secure it by other real estate, however, and then it's a true cash purchase.

 Thanks I'll check that  out. I was just curious because I had seen people mention that it could be done but hadn't seen any real examples.

@Tom S. @Chris Mason

Thanks for the clarity, I figured that was the case but just wanted to verify. Helps just knowing what position I’m in going into this type of situation. 

Bumping this thread and @Chris Mason maybe you can add input here but if a HML counts towards your DTI, how does someone ever refinance out of it?

Ex: HML interest only is $3,000 a month. That is a massive amount of monthly debt to have in addition to your primary mortgage and any consumer debt that you would have. I would imagine it would skew ones DTI ratios way past the front/back end ratios banks are comfortable with. So how would you refinance out of it if you were fix and holding using HML vs fix and flipping it with a HML.

Originally posted by @Peter T. :

Bumping this thread and @Chris Mason maybe you can add input here but if a HML counts towards your DTI, how does someone ever refinance out of it?

Ex: HML interest only is $3,000 a month. That is a massive amount of monthly debt to have in addition to your primary mortgage and any consumer debt that you would have. I would imagine it would skew ones DTI ratios way past the front/back end ratios banks are comfortable with. So how would you refinance out of it if you were fix and holding using HML vs fix and flipping it with a HML.

 I imagine the banks don't count debt that will be taken out. Like if you refinance your house, they don't count your current mortgage otherwise you would be doubling your debt.

Originally posted by @Peter T. :

Bumping this thread and @Chris Mason maybe you can add input here but if a HML counts towards your DTI, how does someone ever refinance out of it?

Ex: HML interest only is $3,000 a month. That is a massive amount of monthly debt to have in addition to your primary mortgage and any consumer debt that you would have. I would imagine it would skew ones DTI ratios way past the front/back end ratios banks are comfortable with. So how would you refinance out of it if you were fix and holding using HML vs fix and flipping it with a HML.

 If you have 5 flips going on at once, all in hard money and with no rental income coming in, then you're screwed and that's that.

If you have a few buy-and-holds with tenants in place that are in HML, it works because when you refinance your new P&I payment is included in DTI (& partially or entirely offset by the rental income, to boot), not the old HML payment. Sometimes this means that you're "forced" to refinance out of hard money all at once, so all the new P&I payments can be used, rather than 1 new payment and 4 old HML payments. We call these "concurrent refinances." 

Note that the first time you refi to exit the HML world, it's often going to be a pain in the butt. Just being real here. All the things that caused you to get HML to begin with, have to be worked through. On top of that, the HML might not care about wonky title issues, but Fannie certainly does.

Originally posted by @Chris Mason :
Originally posted by @Peter T.:

Bumping this thread and @Chris Mason maybe you can add input here but if a HML counts towards your DTI, how does someone ever refinance out of it?

Ex: HML interest only is $3,000 a month. That is a massive amount of monthly debt to have in addition to your primary mortgage and any consumer debt that you would have. I would imagine it would skew ones DTI ratios way past the front/back end ratios banks are comfortable with. So how would you refinance out of it if you were fix and holding using HML vs fix and flipping it with a HML.

 If you have 5 flips going on at once, all in hard money and with no rental income coming in, then you're screwed and that's that.

If you have a few buy-and-holds with tenants in place that are in HML, it works because when you refinance your new P&I payment is included in DTI (& partially or entirely offset by the rental income, to boot), not the old HML payment. Sometimes this means that you're "forced" to refinance out of hard money all at once, so all the new P&I payments can be used, rather than 1 new payment and 4 old HML payments. We call these "concurrent refinances." 

Note that the first time you refi to exit the HML world, it's often going to be a pain in the butt. Just being real here. All the things that caused you to get HML to begin with, have to be worked through. On top of that, the HML might not care about wonky title issues, but Fannie certainly does.

Thanks Chris. In my potential scenario, I have strong W2 and positive rental income even after using Form 1038. The new rents at 75% would be positive vs the new PITI created by the refi. It was the current big HML interest only payment that was throwing me off. Thanks for clarifying!

One follow up - aren't you capped at how many properties you can cash out refinance? Would it be a problem if i have 4+ places already and want to use HML to buy, repair...and then refi out with a conventional loan?

Originally posted by @Peter T. :
Originally posted by @Chris Mason:
Originally posted by @Peter T.:

Bumping this thread and @Chris Mason maybe you can add input here but if a HML counts towards your DTI, how does someone ever refinance out of it?

Ex: HML interest only is $3,000 a month. That is a massive amount of monthly debt to have in addition to your primary mortgage and any consumer debt that you would have. I would imagine it would skew ones DTI ratios way past the front/back end ratios banks are comfortable with. So how would you refinance out of it if you were fix and holding using HML vs fix and flipping it with a HML.

 If you have 5 flips going on at once, all in hard money and with no rental income coming in, then you're screwed and that's that.

If you have a few buy-and-holds with tenants in place that are in HML, it works because when you refinance your new P&I payment is included in DTI (& partially or entirely offset by the rental income, to boot), not the old HML payment. Sometimes this means that you're "forced" to refinance out of hard money all at once, so all the new P&I payments can be used, rather than 1 new payment and 4 old HML payments. We call these "concurrent refinances." 

Note that the first time you refi to exit the HML world, it's often going to be a pain in the butt. Just being real here. All the things that caused you to get HML to begin with, have to be worked through. On top of that, the HML might not care about wonky title issues, but Fannie certainly does.

Thanks Chris. In my potential scenario, I have strong W2 and positive rental income even after using Form 1038. The new rents at 75% would be positive vs the new PITI created by the refi. It was the current big HML interest only payment that was throwing me off. Thanks for clarifying!

One follow up - aren't you capped at how many properties you can cash out refinance? Would it be a problem if i have 4+ places already and want to use HML to buy, repair...and then refi out with a conventional loan?

 Fannie caps you at 10, hidden overlays may be more restrictive.

Originally posted by @Chris Mason :
Originally posted by @Peter T.:
Originally posted by @Chris Mason:
Originally posted by @Peter T.:

Bumping this thread and @Chris Mason maybe you can add input here but if a HML counts towards your DTI, how does someone ever refinance out of it?

Ex: HML interest only is $3,000 a month. That is a massive amount of monthly debt to have in addition to your primary mortgage and any consumer debt that you would have. I would imagine it would skew ones DTI ratios way past the front/back end ratios banks are comfortable with. So how would you refinance out of it if you were fix and holding using HML vs fix and flipping it with a HML.

 If you have 5 flips going on at once, all in hard money and with no rental income coming in, then you're screwed and that's that.

If you have a few buy-and-holds with tenants in place that are in HML, it works because when you refinance your new P&I payment is included in DTI (& partially or entirely offset by the rental income, to boot), not the old HML payment. Sometimes this means that you're "forced" to refinance out of hard money all at once, so all the new P&I payments can be used, rather than 1 new payment and 4 old HML payments. We call these "concurrent refinances." 

Note that the first time you refi to exit the HML world, it's often going to be a pain in the butt. Just being real here. All the things that caused you to get HML to begin with, have to be worked through. On top of that, the HML might not care about wonky title issues, but Fannie certainly does.

Thanks Chris. In my potential scenario, I have strong W2 and positive rental income even after using Form 1038. The new rents at 75% would be positive vs the new PITI created by the refi. It was the current big HML interest only payment that was throwing me off. Thanks for clarifying!

One follow up - aren't you capped at how many properties you can cash out refinance? Would it be a problem if i have 4+ places already and want to use HML to buy, repair...and then refi out with a conventional loan?

 Fannie caps you at 10, hidden overlays may be more restrictive.

 To be clear, Fannie caps you at 10 cash out refi's? I know they cap you at 10 conventional mortgages. Probably considered one in the same but just want to be sure. 

From my experience, most HMLs do not report to the credit agencies (despite most of them requiring a pull to borrower). My company does not report to the agencies, either. What's important to note is that while they may not report to the agencies, therefore not be factored into your DTI, you need to monitor your debt levels to ensure you're not taking on debt obligations that you're unable to afford. While we may not report to the agencies, we will pursue the house we underwrote should you stop paying us to make payments on your primary.

It won't count against your DTI if the bank is setting to pay off that debt with the proceeds of the loan.

It may or may not show up in your credit report, but the payments and deposit will show up on your bank statements, also lying about it is fraud.

You likely can't use delayed financing with it either for the same reason, it's gonna show up on your bank statements

Originally posted by @Alexander Felice :

It won't count against your DTI if the bank is setting to pay off that debt with the proceeds of the loan.

It may or may not show up in your credit report, but the payments and deposit will show up on your bank statements, also lying about it is fraud.

You likely can't use delayed financing with it either for the same reason, it's gonna show up on your bank statements

Ya. Also, unless the HML is a complete idiot, the HML mortgage paperwork will be notarized, recorded at the county, and public record.

The anti-fraud search software ubiquitously used by the mortgage industry often isn't run until a day or two before closing. Typically this is after the homebuyer has lifted all contingencies. Great way to lose an earnest money deposit is to have the underwriter find out about a HML you tried to hide at the 11th hour.

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