How does selling a property with a wraparound mortgage affect DTI

Question

Ok, scenario - I own a house with a conventional fixed-rate mortgage at 3.5% rate.  For simplicity, lets just say I owe 200k on a house.  Now, I want to sell the house to my cousin for 200k using a wraparound mortgage at 4% with no down payment - I'm mostly trying to do this to help out my cousin, not to make profit, so I'm happy with the half point spread.

My question is, if I keep my original mortgage and issue the wraparound to my cousin - how will that affect my debt to income ratio if I go apply for another conventional loan to buy a new house?  Will my existing mortgage still be counted as debt by the mortgage broker?  Will the mortgage payments from my cousin count as income?

I know that with rental properties you only get to count 75% of the rents as income, but with a seller financing wraparound, is that still true?

Jerel Ehlert · Answer

Your proposed lender won't like the wrap, especially if you have several from recent times.

The process will vary by lender, but you should get to offset the note against the debt, and offset some part of the payment you get from the note against the debt payment on the underlying mortgage.  Income against expense; assets against liabilities.

Chris Mason · Answer

No bank is hungry for this type of business, going for it would boost business by at most a fraction of 0.1%, which the approximate percentage of people out there who a) sold via this method and b) don't otherwise already have trashed credit. For the most part, you only do this as a seller if you're in a dire situation, and the 'future mortgage' is a moot point since the person already has 7 or 14 mortgage lates on their credit.

Why can't your cousin qualify for a mortgage on their own?