Income to Debt Ratio too high

16 Replies

So I recently purchased my first investor property (single family home) which was really exciting, we got it rented quickly and the numbers are all where we want. When we had been talking to the bank originally they made it sound like we could do 4-5 investor loans, but now we ran into a wall after our first purchase. We have enough money to do a 20% downpayment on a $40K property, but our income to debt ratio is too high. About 53% and the bank wants it to be around 45% or less. Our income is not very high, around $20K a year, we are self employed and deducted everything we could. We have no debt except our rental property, even our residence is paid off with about $150K in equity. Next year we are going to deduct less, plus our income will be higher in general. We were hoping to buy 1, maybe 2 more properties this year and 2-3 again next year. My business takes a lot of time and I didn't really want to do fixer uppers or flips, I had been planning on only doing ready to go houses or homes that need little repairs, but I suppose I can change my mind on that if thats the best option.

What advice do you guys have for getting financing? Perhaps a HELOC on our personal house, or will that also fall into the income to debt problem. Id really like to buy a second rental property this year, but it seems like traditional financing isn't going to be an option.

Thanks

I second the HELOC, you can probably pull at least 100k out of it and head to your next deal in cash (and then try to refi after). Since your home is owner-occupied, you have a ton of HELOC options. Will your bank allow you to count your rental income? If they don't look towards another bank as many of them do.

If your investment property is doing well, this shouldn't be an issue. Lenders will typically count your rental income as part of the D/I/. The portfolio lender I have been working with counts 75% of my current rental income as regular income. 75% because the assumption is that it can't possibly be occupied 100% of the time, and there's maintenance and repairs etc.. 

So as long as your investment property is bringing in in at least 25% (ish) more than the mortgage + taxes, it should have no impact on your D/I and you should have no problem getting approved for another loan 

Updated almost 3 years ago

p.s. re: "Perhaps a HELOC on our personal house, or will that also fall into the income to debt problem. " My understanding is that the so called "debt" should really be called "debt maintenance costs" so only whatever it costs to maintain your HELOC would be counting against your D/I

If a lender doesn't care about DTI they will care about DSCR. Debt service coverage ratio. It generally needs to be at least 1.2. It is calculated as NOI/yearly debt service cost so it depends on the property characteristics. However they usually just take the numbers you give them as long as they are reasonable so if that is all that is keeping you from getting the loan, you can tweek the numbers.

I am taking the other side on using a HELOC in an up-trending interest rate environment. If I want to take money out of my paid off house, I look for a traditional mortgage, something that doesn't adjust or have a balloon. When we were younger, we moved into a string of owner occupied light fixer properties, improved them and sold after 2 years, obtaining the capital gains exclusion. Owner occupied properties continue to offer lowest down payments, lowest interest rates. And we can move into a multi family, something I didn't consider before we had 3 kids, which enables us to pick up more doors.

Originally posted by @Kerry Baird :

I am taking the other side on using a HELOC in an up-trending interest rate environment. If I want to take money out of my paid off house, I look for a traditional mortgage, something that doesn't adjust or have a balloon. When we were younger, we moved into a string of owner occupied light fixer properties, improved them and sold after 2 years, obtaining the capital gains exclusion. Owner occupied properties continue to offer lowest down payments, lowest interest rates. And we can move into a multi family, something I didn't consider before we had 3 kids, which enables us to pick up more doors.

Thanks, but I'm pretty sure if we can't get a traditional loan, I don't think we can refinance on our home. So thats the main reason I was considering a HELOC.

We have talked about renting our current home and then purchasing a new home as owner occupied. My wife has stipulated that she doesn't want to move into fixer uppers though. We are going to do this in the future, but using it as a way to "upgrade" to a nicer (more expensive and smaller downpayment) home, or if we find a great deal on a good multifamily.

Originally posted by @Omar Matthew Belove :

If your investment property is doing well, this shouldn't be an issue. Lenders will typically count your rental income as part of the D/I/. The portfolio lender I have been working with counts 75% of my current rental income as regular income. 75% because the assumption is that it can't possibly be occupied 100% of the time, and there's maintenance and repairs etc.. 

So as long as your investment property is bringing in in at least 25% (ish) more than the mortgage + taxes, it should have no impact on your D/I and you should have no problem getting approved for another loan 

 Yes, our current bank counts 75% of the current rental income. 

The details on our first rental purchase, not the best, but we don't want to fix things up and don't have time (right now anyway) to do BRRRR. We do plan on doing that in the future, but not right now.

Ok, back to the house. We purchased for $59K from Fannie Mae, appraised for $60K, but an identical house 1 block down just sold for $72K in slightly better condition. Rent is $895, 1 year lease, tenants pay all utilities. We spent about $150 on repairs, but the water heater will likely need to be replaced fairly soon. Taxes $1100, Insurance $788. After maintenance, vacancy, mortgage, etc. cash flows about $323. NOI $593. The loan was approximately $47K at 5.5% with 20% downpayment.

I guess I'm not seeing enough info. to determine how they came up with 53% debt ratio? In order to have a 53% debt ratio on a 20K per year income, you would have to have $883.33 per month in chargeable debt. The way a rental is calculated is Gross Rents X.75% - PITI, if its a negative number, that number gets added to your debt ratio. If its a positive number, that number gets added to your income. So most rentals don't add much or anything to a person debt depending on the monthly rents and cash flow of the property. Some rentals after the calculations add income to the bottom line?

So that leaves your personal or consumer debt and any taxes and insurance costs on your primary. Your primary is paid off, so that only leaves taxes and insurance as a monthly cost? If you have to much consumer debt, I.E. credit cards, installment loans, car payments things of that nature, then just get rid of $133.00 a month in debts to get down to the magical 45% that, that lender wants the debt ratio at? Most loans I do on rentals are Fannie Mae Loans and they allow a 50% debt ratio. If that bank holds you to 45% then find a new lender.

I don't believe a HELOC will be in your best interest just yet. The issue with the HELOC is that the rates tend to be a little higher than 1st mortgage rates. You must qualify as if the full amount of the HELOC was used and what the full payment world be at that point. It will actually make your debt ratio bigger unless you payoff some of your consumer debt with the HELOC and still had enough left on the line to use for future down payments and closing costs. I do think HELOC's are a necessary tool for investors to be used for downs and closing costs, but given your tight income right now, it may not be the best time to go that route, at least not yet?

I would talk to other lenders and see if they will go to 50% on a Fannie Mae loan, you will find them out there. I would then pay off whatever debt it is that you have that puts you over that amount. If its 3% then you have to pay off $50.00 per month and you should qualify? If you cant quite qualify, then charge slightly more in rents, that will also help reduce your debt ratio.

Bottom line, if you want to go forward, don't listen to banks that tell you no. There are many ways within a Fannie Mae loan to do this. Beyond Fannie Mae, there are several investor products (portfolio loans) out there that with a 20% down payment and a 600 score or better and rents that are equal or are more than the PITI of that loan, you can do hundreds of those loans all day long. Don't accept the fact that they are telling you no. Replace that lender!!!

  

Originally posted by @Peter M. :

If a lender doesn't care about DTI they will care about DSCR. Debt service coverage ratio. It generally needs to be at least 1.2. It is calculated as NOI/yearly debt service cost so it depends on the property characteristics. However they usually just take the numbers you give them as long as they are reasonable so if that is all that is keeping you from getting the loan, you can tweek the numbers.

Some lenders don't care about DTI (no income verification loan) and on 1-4's, they don't care about DSCR. Lots of them out there, but the rate is not going to be a Fannie/Freddie rate.

Originally posted by @Matthew T. :

So I recently purchased my first investor property (single family home) which was really exciting, we got it rented quickly and the numbers are all where we want. When we had been talking to the bank originally they made it sound like we could do 4-5 investor loans, but now we ran into a wall after our first purchase. We have enough money to do a 20% downpayment on a $40K property, but our income to debt ratio is too high. About 53% and the bank wants it to be around 45% or less. Our income is not very high, around $20K a year, we are self employed and deducted everything we could. We have no debt except our rental property, even our residence is paid off with about $150K in equity. Next year we are going to deduct less, plus our income will be higher in general. We were hoping to buy 1, maybe 2 more properties this year and 2-3 again next year. My business takes a lot of time and I didn't really want to do fixer uppers or flips, I had been planning on only doing ready to go houses or homes that need little repairs, but I suppose I can change my mind on that if thats the best option.

What advice do you guys have for getting financing? Perhaps a HELOC on our personal house, or will that also fall into the income to debt problem. Id really like to buy a second rental property this year, but it seems like traditional financing isn't going to be an option.

Thanks

 Matthew

Here are a couple of observations. 

  1. Start looking for units.  A 4 unit property will bring in more income than a single family generally and you won't get stuck for the total mortgage payment when one tenant decides to go rogue.
  2. Find a good mortgage broker that can help guide you through the morass of lending options.  
  3. I would take out the HELOC, but only use it for down payment and closing costs and maybe some operating costs until you can start saving money.
  4. Get a no income verification loan for the bulk of the financing on your upcoming purchases until you can qualify for a Fannie Mae type loan.

Best of Luck

Stephanie

Originally posted by @Stephanie P. :
Originally posted by @Matthew T.:

So I recently purchased my first investor property (single family home) which was really exciting, we got it rented quickly and the numbers are all where we want. When we had been talking to the bank originally they made it sound like we could do 4-5 investor loans, but now we ran into a wall after our first purchase. We have enough money to do a 20% downpayment on a $40K property, but our income to debt ratio is too high. About 53% and the bank wants it to be around 45% or less. Our income is not very high, around $20K a year, we are self employed and deducted everything we could. We have no debt except our rental property, even our residence is paid off with about $150K in equity. Next year we are going to deduct less, plus our income will be higher in general. We were hoping to buy 1, maybe 2 more properties this year and 2-3 again next year. My business takes a lot of time and I didn't really want to do fixer uppers or flips, I had been planning on only doing ready to go houses or homes that need little repairs, but I suppose I can change my mind on that if thats the best option.

What advice do you guys have for getting financing? Perhaps a HELOC on our personal house, or will that also fall into the income to debt problem. Id really like to buy a second rental property this year, but it seems like traditional financing isn't going to be an option.

Thanks

 Matthew

Here are a couple of observations. 

  1. Start looking for units.  A 4 unit property will bring in more income than a single family generally and you won't get stuck for the total mortgage payment when one tenant decides to go rogue.
  2. Find a good mortgage broker that can help guide you through the morass of lending options.  
  3. I would take out the HELOC, but only use it for down payment and closing costs and maybe some operating costs until you can start saving money.
  4. Get a no income verification loan for the bulk of the financing on your upcoming purchases until you can qualify for a Fannie Mae type loan.

Best of Luck

Stephanie

 Who offers no income verification loans? I'm in Kansas and haven't seen any banks do this.

Originally posted by @Matthew T. :
Originally posted by @Stephanie Potter:
Originally posted by @Matthew T.:

So I recently purchased my first investor property (single family home) which was really exciting, we got it rented quickly and the numbers are all where we want. When we had been talking to the bank originally they made it sound like we could do 4-5 investor loans, but now we ran into a wall after our first purchase. We have enough money to do a 20% downpayment on a $40K property, but our income to debt ratio is too high. About 53% and the bank wants it to be around 45% or less. Our income is not very high, around $20K a year, we are self employed and deducted everything we could. We have no debt except our rental property, even our residence is paid off with about $150K in equity. Next year we are going to deduct less, plus our income will be higher in general. We were hoping to buy 1, maybe 2 more properties this year and 2-3 again next year. My business takes a lot of time and I didn't really want to do fixer uppers or flips, I had been planning on only doing ready to go houses or homes that need little repairs, but I suppose I can change my mind on that if thats the best option.

What advice do you guys have for getting financing? Perhaps a HELOC on our personal house, or will that also fall into the income to debt problem. Id really like to buy a second rental property this year, but it seems like traditional financing isn't going to be an option.

Thanks

 Matthew

Here are a couple of observations. 

  1. Start looking for units.  A 4 unit property will bring in more income than a single family generally and you won't get stuck for the total mortgage payment when one tenant decides to go rogue.
  2. Find a good mortgage broker that can help guide you through the morass of lending options.  
  3. I would take out the HELOC, but only use it for down payment and closing costs and maybe some operating costs until you can start saving money.
  4. Get a no income verification loan for the bulk of the financing on your upcoming purchases until you can qualify for a Fannie Mae type loan.

Best of Luck

Stephanie

 Who offers no income verification loans? I'm in Kansas and haven't seen any banks do this.

 Look at my list.  Number 2.  You have to find a good mortgage broker.