Debt to Income Ratio Holiday Blues

10 Replies

I have read other threads like this but I still can't seem to figure out what to do...

I have 3 rental units. They all cash flow $300-$500 a month. Each tax season I input all of my income and my deductions/repairs/expenses/etc. By the end of it I don't have any taxable income from my rental properties, only the small income I get from being a seasonal park ranger. 

I have read on these threads that a small bank or credit union, one that keeps loans in house, will look at the cash flow numbers of the investment and not at my taxable income, or lack there of. Yet, just moments ago, I got an email from my mortgage loan officer saying that my debt to income ratio was too high and they won't be able to move forward with approval.

This has happened a few times now and I solve it by asking my parents to co-sign. I'm a responsible 32 year old and this feels a bit odd each time I do it, but it gets the job done.  I'd love to move forward on my own though.

How can I change this? How do others, that have real estate as their main income (with minuscule taxable income) make this happen?

Assuming the rentals are ballpark cashflow neutral, your DTI will come down to approximately:

1) Your personal "day job" income. Increasing this will improve DTI. If you want to get your parents off the hook, you may want to consider moving to full time.

2) Your personal housing expense. Reducing this will improve DTI. This is your personal home's PITI or the full amount of the rent specified on the lease you have signed.

3) Your consumer debt obligations, car payments and the rest. Reducing these will improve DTI.

4) The rental income of the property you are buying offsetting it's own PITI. This one is important, a LOT of residential loan originators will not include this, even though the guidelines clearly allow it. This is niche territory, like reverse mortgages, or spinal surgery (you wouldn't ask a general family doctor for spinal surgery would you?).

"I have read on these threads that a small bank or credit union, one that keeps loans in house, will look at the cash flow numbers of the investment and not at my taxable income, or lack there of. Yet, just moments ago, I got an email from my mortgage loan officer saying that my debt to income ratio was too high and they won't be able to move forward with approval."

A few things are being conflated here. True "cashflow only" type loans come in two broad varieties:

1) Commercial financing. Regional bank or credit union is the right tree, but you're barking up the wrong branch. You don't want to be talking to the residential LO, it's a totally different product line. Talking to the residential LO for commercial financing is like walking onto a vanilla Ford car dealership for an 18 wheeler, or talking to the solar panel salesman for a nuclear power plant you want to build. Ask to speak to a commercial loan originator. 30YF will typically not be around, ARM with a 20 or 25 year term is what to expect. DSCR 1.25% is the norm, which might be hard with the shorter loan term. These guys strongly prefer the $1.5m apartment complexes, but there's no law that says you can't get a commercial loan on a 1-4 unit investment property, it's just not super common practice for people with only a few properties.

2) Residential "non-qm" financing. This will be from your local mortgage bank (Guaranteed Rate, loanDepot, to name a few) or a local independent mortgage broker (I'll spare you the plug, I'm sure you can divine which route I'd suggest). 30YF is still around here, but the rate/fee combo will be higher. DSCR of as low as 1% is out there, with risk-based rate/fee adjustments.

In either case, they close slow as all hell, preapprovals really aren't a thing, note that we're talking DSCR of the property and not DTI of you personally, you need to have the property in escrow before it can be evaluated for a go/no-go ("cashflow only" MUST be property specific, by definition), which in turn means vanilla residential Realtors (at least in the SF Bay Area, which is what I can speak to) are going to be hesitant to show properties. Because of this, you will have an easier time with a FSBO who doesn't have a listing agent telling them to throw your offer in the trash since these other 5 or 15 offers have buyers that are preapproved.

Thanks Chris, your reply is incredibly comprehensive. I think I may have totally overlooked my personal housing expense. To be honest, I bought two rental properties right before buying the home we live in. The income from those properties has always gone straight to paying the mortgage of our home, which sort of allows me to forget about that mortgage all together. The checks come in and go right back out again (haha). 

We are actually planning on selling this home (its in the woods) and buying/moving into a duplex (its in the city) to house hack. Maybe this move will help my DTI ratio.

Thanks again for your comments.

Cheers

Originally posted by @Eric Zawadski :

Thanks Chris, your reply is incredibly comprehensive. I think I may have totally overlooked my personal housing expense. To be honest, I bought two rental properties right before buying the home we live in. The income from those properties has always gone straight to paying the mortgage of our home, which sort of allows me to forget about that mortgage all together. The checks come in and go right back out again (haha). 

We are actually planning on selling this home (its in the woods) and buying/moving into a duplex (its in the city) to house hack. Maybe this move will help my DTI ratio.

Thanks again for your comments.

Cheers

 Yup, so here's how it's currently playing out, with made up numbers.

Net positive cashflow - $1300/mo

Seasonal job, annualized - $900/mo

Personal house PITI - $1200/mo

So you're paying your personal mortgage with the cashflow, and living modestly on $900/mo. That's how I would read that as a person. And perhaps how you are looking at it. You're household cashflow is $1300+$900-$1200 = $1000. (Some of that $1000 will be spent on maintenance) 

As a mortgage person of the residential variety looking at FNMA guidelines, however, I see it as $1200 / ($1300+$900) = 57% DTI = denied. (Actually it will be worse, your maintenance expenses on tax returns will be subtracted from the $1300/mo).

Also this is the answer to the middle school kid asking "man, division, subtraction, order of operations is stupid, why do I need to know it, when will I ever use this?" -- the only real difference in the above two calculations is a subtraction symbol is replaced by a division symbol, and you get wildly different results.

Doing math "your" way is actually a thing, that $1000 left over is called "residual income" by us, and there are some loan programs that require it in addition to checking the DTI box. Once in a very rare blue moon you come up against a scenario where DTI works, but residual income does not for that particular loan program (VA loans being the most common example).

@Chris Mason is spot on here.

I wanted to add that where he is talking about 'cash flow only loans' there *might* be exceptions in your area. I think you are in a similar area to me in WI, not in a larger competitive city where stuff screams off the shelves.

We found a regional lender in our area where they do BOTH the 30 year fixed stuff AND 'Commercial Blanket Portfolio Loans' for loans down to about 50K. We can keep them separate per property or 'blanket' then to cover a set of properties.

They are 20% down, about 5.25%, 10 year lock with 25 year amortization. DSCR has to be 1.1 or better, we like to personally stick to 1.2 or better.

One advantage of the 'blanket' way is in using your equity. An example is the last set of 3 duplexes we bought for about 500K we needed 100K down (20%) and a 400K loan. The appraisals came in at about 540K so they would loan us 430K or 80%. We only borrowed 380K so had 50K of 'space left' so set it up as a HELOC on the group in case we run into needing 3 roofs at once of some such thing. Only cost an extra $100 or so for paperwork.

So Chris is right, find the Commercial Loan Officer, and call until you get one.

Hello @Eric Zawadski

Okay I'm running into a similar issue with DTI being to high.

What I'm coming across is how banks/lenders are calculating the rent I receive on the property with the mortgage payment that is on it. 

So my lender is giving me 75% of my rental income. So basically I need a tenant already in the new home to lower my DTI or put a renter in my property I'm in now and that will lower my DTI

Hopefully that helps in a way. 

@Chris Mason  

To touch on what you wrote. On #4 you said for the rental to offset the PITI

and by this @Eric Zawadski  

In my scenario I just bought an investment property. It can rent out for $1,300 so I times that by .75  (75% of the rental income) = $975 

So as long as my PITI is lower than $975, there will be no debt that is counted against me.

Originally posted by @Trevor Aydelott :

@Chris Mason 

To touch on what you wrote. On #4 you said for the rental to offset the PITI

and by this @Eric Zawadski  

In my scenario I just bought an investment property. It can rent out for $1,300 so I times that by .75  (75% of the rental income) = $975 

So as long as my PITI is lower than $975, there will be no debt that is counted against me.

 As a refinance, they will not be using projected rents. They will use actual rents as evidenced by things like a signed lease, deposited rent checks, etc, provided those actual rents are not wildly inflated relative to appraised market rents. Every single type of scenario is slightly different. 

Exactly @Chris Mason

That is what I was saying, $1,300 is the rental agreement. So as long as my cash out refinance mortgage is cheaper than $975 then no debt will count against me. 

Originally posted by @Trevor Aydelott :

Exactly @Chris Mason

That is what I was saying, $1,300 is the rental agreement. So as long as my cash out refinance mortgage is cheaper than $975 then no debt will count against me. 

 I believe you are asking this question about 5 days too late.