debt-to-income calculation when only one spouse is investing?

Question

Hello BiggerPockets! I'm new to investing and hoping someone can give insight on a financing question I can't seem to find the answer to.

My husband and I own a single family home in Boston, MA, and are both on the mortgage for the house (but were unmarried at the time of purchase last year), which is a conventional 30YF. I have been in conversation with a potential investment partner in Texas, a friend of mine who is single and does not hold a mortgage himself currently, about the two of us teaming up to buy a property there (either a single family home or a duplex most likely) to BRRRR. One scenario would be buying and rehabbing the property with cash, and then doing a cash-out refinance to recoup the capital, versus buying the house with financing and then doing a subsequent refi. In either scenario, my friend and I would either be applying for a loan together, or I would apply for it under my name only. My husband approves of this venture, but has no interest in being involved himself and would not want his name on any of the paperwork.

My question is: would a lender use the full amount of my current mortgage in calculating my debt-to-income ratio, or would they say that I am only responsible for half of it, since my husband's income also goes towards that loan? I am confused about how to get approved for a new loan by myself or with a business partner when my current debts and assets are shared by a spouse who will not be a part of the deal.

I can give more details if necessary but hopefully the basic question makes sense. Thanks in advance!

Sara

Lien Vuong · Answer

Very likely you're responsible to the entire mortgage because if something happened to your husband you would be liable for the entire debt of the home. One work around to the DTI issue is to go through commercial lending which would doesnt care about you as much as the actual performing asset.

Jonathan Bombaci · Answer

Lots of great answers here. Just to echo a few points. I was in a similar situation and left my W2 job for full time real estate so my paper income plummeted making any DTI calculation comical.

We formed a LLC and bought positively cash flowing properties with a commercial lender that used the 1.25 DSCR calculation. They gave us preapproval and based the calculation on a 12 month proforma (not current rents). Since we ONLY buy properties that we can get to a 1.3 DSCR (more conservative than the bank) within 12 months, every property we buy improves are global DSCR making it even easier to get the next loan. We have about $5M of loans with the credit union now, 15 properties, and have become one of their best partners.

Best,

Jon

Chris Mason · Answer

For that specific transaction wherein you are purchasing that duplex, yes that is the correct math.

For properties you have owned a while that appear on tax returns, those tax return numbers are used b/c they are at that point more authoritative.

Michael Glist · Answer

@Sara Walters So for a DSCR loan you can be pre-approved and can receive a pre-approval letter. The letter will just have a few additional stipulation such as verifying rental income and appraised value. The main thing during pre-approval on a DSCR loan we would look at would be credit to ensure it meets our criteria and there aren't any concerns such as recent foreclosure or judgements or tax liens. We would also be looking at assets. We would want to make sure that you have enough funds to cover the down payment, closing costs as well as 3-12 months worth or reserves. Also no financial crimes convictions on your record.

As long as all of that is good you should not have a problem refinancing. The only thing that you may run into when refinancing is the seasoning period. Typically lenders like to make sure that you have owned the property for at least 6 months before they will allow you to refinance. So just take that into consideration when talking to lenders as well as when running your initial numbers to make sure that you account for a 6+ month holding period as opposed to 4 months or whatever it may be.

I hope this helps. If you need any clarification on anything I am happy to answer any questions.

Sara Walters · Answer

@Torrell Palmason

@Michael Glist

Thanks for the informative replies - I hadn't heard of Bank Statement Loans or DSCR Loans; are these just types of portfolio loans issued by individual banks? Can you get prequalified for a Bank Statement Loan the same way you'd do for a conventional loan, before you go looking for a property?

I'd assume a DSCR loan wouldn't include a preapproval since you'd need to demonstrate the actual rental income amounts from a particular property in order to get it. My nagging worry would be that if we bought a place with cash and then somehow couldn't get it refinanced through any type of conventional or non-QM loan, all of the capital and equity would remain tied up in the property.

Trevor Reed · Answer

@Sara Walters you can definitely use HELOC money but the debt service created by that will be counted against your DTI. To clarify, you only have a monthly payment if you pull money from your HELOC.

Sara Walters · Answer

@Lien Vuong, @Mike Reynolds, @Trevor Reed - thank you all for the insight, this is helpful! Our full PITI payment is about 24% of my gross monthly income (excluding my husband's income) so that doesn't leave too much of a margin for me to stay below the usual 28% front end DTI if I were the only one applying for a new second mortgage, but maybe it's still possible.

Mike - the LLC is an interesting thought. Yes, I had always heard that it could be hard to finance a property outright with an LLC, so I'd always assumed it would have to be done in an individual's name first and then transferred to an LLC afterwards. Did your new LLC have to demonstrate a certain amount of cash in reserves? I wonder how the bank would know whether it's an acceptable risk to lend to a business that's not yet showing its own income.

Trevor - luckily we don't have a car payment, CC debt, or personal loans in the mix, although I do have a student loan (in my name only), so I wouldn't be able to reassign that to him. Our tax status going forward will be married filing separately (for student loan purposes... complicated) so I have no idea whether that will prove more or less confusing at tax time next year. Another wrinkle is that I was debating whether it'd be a good idea to get a HELOC on our house as another source of capital, but would that also be factored into my DTI? Or is that only part of the equation if you draw on it and have a required monthly interest-only payment?

Trevor Reed · Answer

@Sara Walters You will be on the hook for the PITI of your home, at least for a non-commercial loan. If you go commercial lending you'll have a lot of options but you'll usually end up with other downsides as well. A couple things to consider would be to possibly move car debt, personal loans or cc debt over to your husband (assuming you aren't joint) to loosen up your DTI. Would be easy to add your husband and then you'll have additional income and the debt issue probably goes away but obviously if he wants nothing to do with it then you could just not involve him :) Depending on how you file taxes, it may still show up on the tax returns - so he may not be able to fully avoid being associated with it.

Mike Reynolds · Answer

I had a similar situation. Put the second property in an LLC and see if they will finance it that way.

I know, I know. People here will tell you that you can't finance it in an LLC right off the bat. I thought that too but I got mine. First deal too with a partner. Brand new LLC and brand new loan. That way they know what they are dealing with at first. Your LLC gets credit rating and you get peace of mind.

Don't think you need a high rating either. We had a 655 for my partner and a 740 for me. We did a commercial property so that may be different than a residential. Now the LLC has credit and we are on a roll.

My partner is a good risk though. He was the way I once was. He paid cash like I did. Just make sure your partner is solid.

Warren Lizo · Answer

@Sara Walters Having you or your spouse (one person) as the sole mortgagor on your primary residence is a good move IMO. It has worked well for us in different ways including DTI for real estate, tax reporting, and liability!

debt-to-income calculation when only one spouse is investing?

debt-to-income calculation when only one spouse is investing?

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