Working on 4th property; issues now with DTI, how to get funding?

13 Replies

Hi Everyone, Looking for your great advice and experience 

I'm working on acquiring a 4th rental and am concerned that a bank won't finance me because I'm already approaching the 45% DTI limit.

I'm calculating this by taking our (mortgage+tax+insurance on our current properties) divided by (75% of rental income + our w2 income) and I currently come out around 41%. Note; we have no other debt. 

I know there are commercial loans that would look only at the deal and not my personal finances, and there are options for hard money....but I've read about others getting up to 10 properties via conventional lending. Are incomes of these people so high that they stay under the 45%? Is 45% dti not actually a limit? How do I get my next deal financed? 

Will your lender take into consideration the income you will receive from your new rental?  They should look at at least 75% of your newly acquired income. This might be enough to allow you to squeeze it in?

You can search for private money but will be paying higher rates. There is always other options. Just depends on which will work for your current situation.

I agree with kyle, talk to your lender. I was talking with mine the other day about DTI and he advised me he can use 75% of the rent on a year long lease if its a new property that hasn't shown up on my tax return yet.

Thanks @Matt P. & @Kyle Boughton thats a good point about being able to add 75% of the new potential rental income. 

Up in WA even a great deal will push my dti higher

Doing an example case; hypothetically current properties with PTI of $88,800/yr and income of $215,000 (using 75% of rent + 100% of w2) puts me at 41.3% DTI

Adding in another deal similar to one that I recently did (monthly  PTI of $1650 and rent of $2200); using the 75% of income that would add $19,800yr of income and add $19,200yr to debt; making it $108,000 / $234800 = 46%

Is the 45% dti limit on investment properties a hard or soft limit, or any way around it?

I believe the 45% limit is a strict Fannie Mae guideline. The lenders I work with will run your info through a system and if your surpass the DTI you will automatically be rejected. I believe they just raised the DTI from around 40 to 45. So it's a little easier now. But maybe a lender can overrule the guideline. I would be curious to know.

Maybe a lender on here can give some insight but my guess is you will need to play with some numbers to meet the DTI requirement or look at other lending options.

@Chris Mason can you help shed some light on this?

I have done all of my loans with commecial portfolio lenders so far since they are held in 3 way LLCs but am thinking of going the conventional route on a couple of upcoming solo projects and have been reading up on it. 

My *understanding* of it goes like this;

  • W2 Income of $4000 per month
  • The debts of the LLC that I am a partner in dont affect my DTI since I am not directly responsible for them.
  • Current debts of $1800 per month
    • PITI of $900 on house
    • Car payment of $400
    • Boat Payment of $200
    • 0% CC payment of $300

    So my DTI would be 1800/4000 = 45%

Now if I add a new rental that has and income of $1500 month, and PITI of $1125, that is actually a 'net positive' of $25 a month. It looks like this:

  • Income of $1500 *.75 = $1125 (only counting 75% of income allows for vacancy, PM, repairs, etc...)
  • New PITI of $1100
  • 'Net Benefit' of an extra $25 month.

It is NOT figure as $2900 total income / 5125 total debts for a 56.5% DTI. This way, if you can find properties where 75% of rental income can cover PITI on new rental properties you should be able to add them with no negative affect to your DTI ratio.

Again, this is just my understanding from what I have read and talked to a couple of lenders.

Dan Dietz

Originally posted by @Daniel Dietz :

@Chris Mason can you help shed some light on this?

Now if I add a new rental that has and income of $1500 month, and PITI of $1125, that is actually a 'net positive' of $25 a month. It looks like this:

  • Income of $1500 *.75 = $1125 (only counting 75% of income allows for vacancy, PM, repairs, etc...)
  • New PITI of $1100
  • 'Net Benefit' of an extra $25 month.

It is NOT figure as $2900 total income / 5125 total debts for a 56.5% DTI. This way, if you can find properties where 75% of rental income can cover PITI on new rental properties you should be able to add them with no negative affect to your DTI ratio.

Again, this is just my understanding from what I have read and talked to a couple of lenders.

Dan Dietz

 It's somewhat niche like reverse mortgages or timeshare lending, but yes done correctly that is the correct math for non owner occupied investments. 

If a tenant is in place paying less than appraised fair market rents, that amount is used instead of appraised fair market rents. 

@Christian Wathne If the properties and rental income are already listed on your tax returns, DTI will be calculated off the tax returns (schedule E), so other expenses listed will also count against you.

75% of the rent from the 4th rental should also be counted.

The maximum DTI is now up to 50%. The maximum allowed would be determined by automated underwriting.

@Christian Wathne Stephanie hit the nail on the head for you ^.

If you have owned your rentals for less than 2 years, you are calculating the income properly, i.e. gross rents - PITIA x .75. If you have owned them close to 2 years and claimed them on tax returns then your rental incomes will be based off of your tax returns, not the above mentioned calculation.

As far as the DTI limits, there are compensating factors that allow you to have an AUS approval with DTI ratios above 45%, cash reserves in your bank account, more than one wage earner on the loan, larger down payment, etc.

Most people stay below the DTI limits because the property they are acquiring will cashflow enough to cover the cost of the new debt (at gross rent - PITIA x .75). If the property currently has tenants use their lease, if it is vacant you can get a rent schedule with your appraisal and use the fair market rent in the area that is decided by your appraiser.

Talk to your lender and have them run numbers for you, if they can't get it approved you could always talk to a local portfolio lender in your area. If the home is in WA I can give you the info of my portfolio lender, otherwise if it is in CA I am of no help to you, unfortunately.

Updated 9 months ago

Should have proof-read before I posted! For the new property you would use (Gross rent X .75 - PITIA).

Hi Christian,

Under no circumstances take no for an answer! 

You have to keep looking for other lenders, and how they view your finances. The little, tiny difference can be enough to give you the OK. You mentioned (our w2 income) so there are two of you? Are the porperties in both names? Or just one? Are both of you applying for a loan? Or just one? Besides national banks. Credit Unions and small local banks can be a great source of funding. I am currently knocking on loan #12, and it has been a on going challenge to take SO SO many no's with the one golden YES!

Don't give up!

Originally posted by @Christian Wathne :

Hi Everyone, Looking for your great advice and experience 

I'm working on acquiring a 4th rental and am concerned that a bank won't finance me because I'm already approaching the 45% DTI limit.

I'm calculating this by taking our (mortgage+tax+insurance on our current properties) divided by (75% of rental income + our w2 income) and I currently come out around 41%. Note; we have no other debt. 

I know there are commercial loans that would look only at the deal and not my personal finances, and there are options for hard money....but I've read about others getting up to 10 properties via conventional lending. Are incomes of these people so high that they stay under the 45%? Is 45% dti not actually a limit? How do I get my next deal financed? 

 I am confused by your formula where you are "dividing" property expense by property income and your income.  I think you have your formula wrong (or maybe I am reading wrong).  Let me see if I can help you go about figuring it from a different perspective (maybe I calculate math differently :) )

Keep your income out of it for just a minute.

Let's say you have a property that costs (PITI) $25,000 per year (I like round numbers).

Then let's say you receive rents (considered fair market value) of $35,000 per year.

You take 75% of the rental amount (35000 X 75% = $26,250)

So, theoretically, you should be able to ADD $1,6250 (26,250 - 25,000 = $1,6250) to your income to help you qualify for the next property.

NOW, this is a ROUGH estimation.  The lender will actually go through a whole process that has all kinds of confusing formulas in it, BUT if you use that simple formula, you will have a GOOD IDEA of where you will end up with the lender.

ALSO, like already pointed out, any of the properties that already show up on your income taxes will count for whatever the PROFIT/LOSS line item shows for the property INSTEAD of using the 75% rule.  The lender will take a 2 year average to come up with the number.  THIS IS IMPORTANT to know...... IF you rehabbed a property within the last 2 years, and you show a loss, then that loss of income will work against you instead of working for you.  Does that make sense?

So, don't mess up your formulas by adding in your personal income until the very end.

Long story short = IF 75% of your rental income is MORE than your rental expenses (PITI), then you ADD the overage to your personal income and THAT is the income you can use to qualify.

Thanks all for the point about if a property has been around for more than 2 years the lender will go based on whats in schedule E. 

@Cara Lonsdale ; I believe you're missing half the equation  in your example. You're adding in the income side, but you left the debt side blank. Adding in another property that has debt of 25k/yr and income (after the 75%) of $26250/yr will raise a persons debt to income ratio. Yes it cash flows a little bit, but the debt to income on that specific property is high and will raise a persons overall debt to income ratio. 

No.  It won't.  The lender considers the debt covered if the 75% rental income still exceeds the debt.  In that case, the lender is looking only at the overage, and adds that into your personal income.  That is why you can't calculate it the way you are doing by adding in your personal income with the rental income and then subtracting debt.  You are over complicating it.

Each property is figured separately.  So you take rental income and subtract the debt.  THEN what is left is added (or subtracted) from your personal income.

When figuring it with a 2 year tax history, you have to have each property stand alone.  If you go back to your taxes and check line 17 of your 1040.  Is it a positive number or a negative number?  To dig down further, go to each schedule E and check line 26.  

If these are positive numbers, then that is all the lender is going to look at (averaged over 2 years) because the debts are already deducted from that.

@Christian Wathne I believe @Cara Lonsdale 's example, and my understanding anyway, that property would essentially be a "wash" for itself. Meaning the payment wouldn't count towards the borrower's DTI as it is covering itself using the 75% formula. However, the remaining $1,250 would be added to the borrower's income to use against another property (and I believe it may be used on a 1:1 rather than 45-50% DTI if I'm not wrong since it's already 75% of the actual income, but I'm sure somebody will correct me).

If the property is not cash flowing, then the remainder balance of the payment would get added to the borrower's expenses and be factored into the DTI.

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