DTI Ratios For FNMA Loans When Borrower Has Rental Properties

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DTI Ratios For FNMA Loans When Borrower Has Rental Properties

Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes

Okay...With all of the threads going around about FNMA properties 5-10 I wanted to clarify how "DTI" is calculated for rental property for both the front-end and back-end ratios for:

1. Rental Property With Mortgages On Your Credit Report
2. Rental Property With Mortgages Purchased Subject-To
3. Conforming Loans
4. FHA Loans
5. Purchase Money Versus Refinance Money
6. Properties 1-4 Versus 5-10
7. Portfolio Loans On Your Credit Report
8. Commercial Loans On Your Credit Report (personal guarantee)

I don't think that item 5 or 6 matter, but I wanted to ask just to make sure. I guessed on items 7 and 8. Here is what I think happens:

1. Count 75% (non-FHA) of gross rents in "Income" for both ratios
2. Doesn't count at all for either debt or income for both ratios
3. Count 75% of gross rents in "Income" for both ratios
4. Count 85% of gross rents in "Income" for both ratios
5. Rules don't change for refi versus purchase money
6. Rules don't change for properties 5-10 versus 1-4
7. Doesn't count at all for either debt or income for both ratios (not sure about this one)
8. Doesn't count at all for either debt or income for both ratios (not sure about this one)

Any clarity that our lender wizards can provide is appreciated. It is completely nonsensical that these ratios are used to me given that 15% and 25% are very skinny and seem to be completely arbitrary. I guess maybe the lenders are just looking at vacancy for the debt service or some such. I would never have thought a simple DTI calculation would be so involved :D

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David Beard
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
15y

Hey, Brian A., I don't think that's particularly conservative, sounds very rationale. Taxes and insurance will total 13% of rents, typically (assuming T+I = 2.5% of house value, and your gross annual rent yield is 20%). So 87% * 60% = 52%. This is spot-on the "50% rule", so seems very reasonable. [I do recognize that we're normally buying properties at way under assessed value, and there may be a lag on tax relief as we pursue the appeal of the assessed value.]

Secondly, they *should* subtract the P&I from the net operating income derived above, and your net positive cash flow should then flow to the income (denominator) of the ratio. They should NOT split the P&I (or PITI) into the Obligations and the NOI into the Income, though I believe some like to do this, especially for newer investors. Fannie/Freddie guidelines indicate that Net Positive Cash Flow (NOI-vacancy-reserves-P&I) goes to Income.

My lender at US Bank tells me that for new purchases, or for other properties you haven't owned long enough to have a track record as documented on prior year tax return, they use (per Freddie guidelines) 75% of lease income, and that the 25% only covers vacancies. Then they subtract expenses, replacement reserves, prop mgmt (whether you use it or not), and PITI. Now THAT's conservative. I've asked for a citation as to how they interpret it that way. It's a little vague in this Freddie document, I'll admit:

http://www.freddiemac.com/learn/pdfs/uw/rental.pdf

By contrast, Fannie’s selling guide clearly says that the 25% covers vacancies + maintenance expenses.

At any rate, my working assumption is that as long as I have two years to landlording experience and my properties are cash flow positive even after using a 25% vacancy rate (which they SHOULD BE), that new purchases will always improve my DTI ratios, and the only issue is coming up with more down payments and cash reserves ......

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  • Mark B
    Investor · Albuquerque, NM · Member since 2009 · 118 posts · 43 votes
    15y

    Thanks for posting this Bryan. I'm looking to refi a commercial building, and was wondering how my rental income is counted. Nice to learn that 75% is counted. I feared none would count for some reason.
    thanks.

    0Reply
  • Bryan Hancock
    OP
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    15y

    You're welcome Mark. Hopefully some of our experienced brokers will drop some knowledge on us about the questions posed above. I did a poor job of addressing this and I think that is why I got zero responses until now. I should have broken the questions up across the thread!

    0Reply
  • Account Closed
    Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
    15y

    bryan,

    like i said in your other thread that was very similar to this one...my lender considers the sub2's and owner financed properties i have a financial obligation and thus a debt...they also use the rental income from the sub2 properties and owner financed properties to calculate my DTI...as far as i know, you must disclose all financial obligations to the bank on mortgage applications, and that includes properties you've bought owner finance and sub2..not saying everyone does it, but i'm working on a long term relationship with my banker, so i do it...something else to consider--i just had my credit ran and the portfolio loans i have that are commercial rate don't show up on my credit report. they are in my LLCs' names, but i do personally guarantee them..again, i disclose these loans when applying for new loans, but thought i should mention...i'm curious how others handle this situation? people who buy rentals sub2 and owner financed, are you not disclosing these properties and debts to banks when applying for new loans? how do you explain the income from these properties to the banks if so? are you reporting the income from these properties at tax time?

    2Reply
  • Bryan Hancock
    OP
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    15y

    Thanks Bryan...I disclose everything, but it is unclear how the lender calculates "Income" in the ratio. This post was an attempt to try to figure it out ;-)

    0Reply
  • Sharad M.Pro Member
    Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
    15y

    I always thought it would be a mortgage fraud if you don't report all your obligations including Sub-2s and owner financed?

    Podcast Guest on Show #155
    0Reply
  • Bryan Hancock
    OP
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    15y

    To be clear...This thread is not about not reporting mortgages. It is about how the lender counts income from the properties in the DTI calculation.

    0Reply
  • Account Closed
    Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
    15y

    i get it now bryan..sorry, thought you were going somewhere else with this thread..i didn't realize most bankers consider income from different loan products differently...like i said earlier, my banker considers rental income and debts equally across all loan products

    0Reply
  • Bryan Hancock
    OP
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    15y

    Well that is because "income" shouldn't vary on the loan type so your rationale is completely sane. Hopefully we will get some lenders to chime in soon.

    0Reply
  • Account Closed
    Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
    15y

    had a meeting with my banker yesterday....just for comparison's sake, my banker takes gross rents and subtracts taxes and and insurance...he takes 60% of what's left and counts that as income...that is super conservative!!

    0Reply
  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    15y

    Hey, Brian A., I don't think that's particularly conservative, sounds very rationale. Taxes and insurance will total 13% of rents, typically (assuming T+I = 2.5% of house value, and your gross annual rent yield is 20%). So 87% * 60% = 52%. This is spot-on the "50% rule", so seems very reasonable. [I do recognize that we're normally buying properties at way under assessed value, and there may be a lag on tax relief as we pursue the appeal of the assessed value.]

    Secondly, they *should* subtract the P&I from the net operating income derived above, and your net positive cash flow should then flow to the income (denominator) of the ratio. They should NOT split the P&I (or PITI) into the Obligations and the NOI into the Income, though I believe some like to do this, especially for newer investors. Fannie/Freddie guidelines indicate that Net Positive Cash Flow (NOI-vacancy-reserves-P&I) goes to Income.

    My lender at US Bank tells me that for new purchases, or for other properties you haven't owned long enough to have a track record as documented on prior year tax return, they use (per Freddie guidelines) 75% of lease income, and that the 25% only covers vacancies. Then they subtract expenses, replacement reserves, prop mgmt (whether you use it or not), and PITI. Now THAT's conservative. I've asked for a citation as to how they interpret it that way. It's a little vague in this Freddie document, I'll admit:

    http://www.freddiemac.com/learn/pdfs/uw/rental.pdf

    By contrast, Fannie’s selling guide clearly says that the 25% covers vacancies + maintenance expenses.

    At any rate, my working assumption is that as long as I have two years to landlording experience and my properties are cash flow positive even after using a 25% vacancy rate (which they SHOULD BE), that new purchases will always improve my DTI ratios, and the only issue is coming up with more down payments and cash reserves ......

    2Reply
  • Bryan Hancock
    OP
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    15y

    Thanks for the link David...I will have to study that some.

    0Reply
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