Lenders...
I have a question about how you all calculate Debt-To-Income so I can work backwards and determine how much income someone would need to qualify for a loan.
We are writing some software to model real estate portfolios and want to make sure we're calculating Debt-To-Income to be able to tell people, you'd need to make this much money to be able to purchase these rental properties and show them charts like this one.
So, here are my questions:
1. What is included in the DTI calculation? Rent, Mortgage Payments, HOA?, Utilities?, Property Taxes?, Property Insurance?
2. Are you using 75% of rent? Or, some other percentage?
3. Should we be using 50% DTI ratio? Or something else?
Here's our formula that we used to make the above chart:
MinimumGrossMonthlyIncomeRequired = ((MonthlyRent*.75) - MortgagePayment - (HOA/12) - MonthlyUtilities - (PropertyTaxesDollar/12) - (PropertyInsuranceDollar/12))/-.5
Thanks in advance.
1. Everything you mentioned but Utilities. Also credit card minimum payments, student loans, car loans, leases, child support, alimony, etc.
2. Depends on the situation. If you are talking about a seasoned investor with two years of tax returns there is a formula used based on their schedule E. If you are talking for a new investor, they will take a fully executed lease and proof of deposit from renter - take 75% of that for monthly income. If you are buying a brand new investment property they will typically have the appraiser do a rent schedule of comparable rentals - take the average rent they come up with and use 75% of that for qualifying.
3. I would use 45%. 50% could go through but is going to be the exception and not the rule.
Is the point of the formula to get close to the actual debt to income ratio the underwriter is going to use to qualify? If so, it is leaving out all debts outside of the singular real estate transaction.
Hope this helps.
Thanks @Jeff Dulla!
> 1. Everything you mentioned but Utilities. Also credit card minimum payments, student loans, car loans, leases, child support, alimony, etc.
I will go ahead and remove Utilities. These were Utilities the landlord paid (not ones covered by the tenant) so that's why it was in there to begin with.
In our software, we are not allowing someone to enter in credit card payments, student loans, leases, child support or alimony. What we're calculating is the minimum income required assuming you have no other debt, etc.
> 2. Depends on the situation. If you are talking about a seasoned investor with two years of tax returns there is a formula used based on their schedule E. If you are talking for a new investor, they will take a fully executed lease and proof of deposit from renter - take 75% of that for monthly income.
Yes, we're going to use this to determine how much they'd need to qualify for the next property purchase.
> If you are buying a brand new investment property they will typically have the appraiser do a rent schedule of comparable rentals - take the average rent they come up with and use 75% of that for qualifying.
Thanks.
> 3. I would use 45%. 50% could go through but is going to be the exception and not the rule.
OK. I can adjust that back to 45% instead of 50%.
> Is the point of the formula to get close to the actual debt to income ratio the underwriter is going to use to qualify? If so, it is leaving out all debts outside of the singular real estate transaction.
So, we're actually using it to determine the income they might need to make the purchases they're modeling for their portfolio. If they input into the software they want to buy a property every year or whatever, we want to show them approximately what their income will need to be to do that plan.
> Hope this helps.
It helps a lot. Thank you!
Outside of Fannie Mae, some Non-QM lenders don't use income and employment on the application to qualify based on the DTI. They only look at the debt service of the unit. Some of my investors will allow the loan if the rental income equals the PITI payment on that property. Other investors I have will want 110% of the PITI payment as the min. amount the lease will need to be. That's it for the debt ratio. They will do this at 80% LTV and down to scores of 580.
Thanks @Kevin Romines.
> Outside of Fannie Mae, some Non-QM lenders don't use income and employment on the application to qualify based on the DTI.
That is also good to know.
> They only look at the debt service of the unit.
So, they using DSCR for the property itself only? What are they looking for with that? 1.2? 1.25? I am calculating that as well. In our market, it is harder to get that high on a new purchase.
> Some of my investors will allow the loan if the rental income equals the PITI payment on that property.
Interesting.
> Other investors I have will want 110% of the PITI payment as the min.
That is also interesting.
> amount the lease will need to be. That's it for the debt ratio. They will do this at 80% LTV and down to scores of 580.
Thank you. I do appreciate that info as well.