DTI calculation, for conventional lending

6 Replies

Can any lenders who do conventional lending tell me how wide a snapshot you’d take of my debt obligations when calculating DTI? Like, does the short-term debt service I have now really hamper my borrowing capability for the length of that loan? Here’s the reasoning - We have a 30 year mortgage on primary, law school student loans on 20 year plan, and two car loans on 6 or less. Even though the principal on the cars combined is less than my student loans by 2/3, the combined monthly payments are more than student loans. I’m wondering if I found an extra $10K this year to pay off a car and eliminate my monthly payment $200 or so (or $22K to pay off both cars for extra $450/month), what impact would that have on my ability to borrow on an investment property at 30 year conventional terms? Is there a predictable relationship between more available funds per month and increased borrowing ability? For example, could I assume that an extra $450/month makes me able to borrow roughly $60K more on a new 30 year investment property note?

It’s a straight calculation. I believe the “back end” (total monthly debt obligations) is 45%.
So, $450 in car payment reductions, allows you another $450/mo in mtg payments, or approx another $90k......assuming this doesn’t bump your “front end” DTI of the mtg payment only, above 36%.
These are the conventional DTI’s in my mind, I know they can vary, ask your lender for a real analysis.

Some real lenders can tell me if I’m thinking about this wrong.

Thanks @Chris Mason and @Wayne Brooks - exactly the kind of quick and dirty math I was hoping to find. 

In the market I've been reviewing lately (Rochester NY - hometown), an extra $50-90K in buying power would exponentially increase my ability to close on a decent-quality multifamily instead of SFH.

Will definitely make sure to confirm with local lender, but it's after banking hours and the question was burning in my mind.

@Tim Joyce , reach out to @Tim Swierczek when you have a chance. He is a financing expert and I recently closed on a conventional loan with him. If you are comparing single and multi-family properties I believe you may only need 10% down for a single family property however you will need 25% down for a multi-family property. So DTI is important however your down payment required will also be something to consider.

In general DTI is concerned with your monthly payment obligations. If you are looking to increase your DTI, your purchasing power will typically get bigger by paying down the shortest term debt, likely your car. From a financial standpoint it typically makes sense to pay down the loan with the highest interest rate, typically credit cards, so this is something to think about.

Depending on the properties you are looking at, hopefully you are looking at ones which will positively affect your DTI. If you connect with Tim he can give you an idea where you are at and whether you need to drop your DTI before making a purchase. You were probably in good shape when you purchase your house but the addition of the student loan payments and vehicle purchases could have thrown you over the conventional limits.

@Tim Joyce @Wayne Brooks is correct the quick math is that you can borrow $1000 for $5/month in payments.  So if you reduce your monthly payments by $450, that would roughly increase your maximum qualification by$90,000 or 450/5=90.

Tim Swierczek, Lender in WI (#103522) and MN (#103522)
(651) 772-9000

Also @John Woodrich makes a great point. Your down payment is a major factor. DTI is pass-fail. If your DTI is acceptable it would be better to look at using your capital to buy more properties, and use the cash flow from those properties to extinguish the auto loan debt more rapidly, if it appears they will affect further purchases. @Tim Joyce

Tim Swierczek, Lender in WI (#103522) and MN (#103522)
(651) 772-9000

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