Debt to income ratio problems

40 Replies

Applied for a 5/5 ARM with 10% down. But I didn't qualify due to my debt-income ratio. I already own one SFR in Boise plus my primary residence here in Portland, Oregon. So if I could figure this out, I would own a second SFR.
What the lender DIDN’T do was take future rent on the new house into account at all. They also prorated the rent on my Boise house to account for repairs and depreciation, which brought that number down to around $300, although in reality the rent there more than covers the monthly mortgage payment.

And voilà, I don’t qualify! Any tips? I am a school teacher at a private Catholic high school here so not rich, lol. But these sorts of experiences are getting in the way of my millionaire real estate investor status!

Lenders know there are many costs associates with rent properties, even if you don't. That's why they don't include 100% of rental income in calculating DTI. If you want to buy more property the best bet is to reduce your debt.

Hmm, true that they understand the situation better than I do! 

But reduction of debt (unless I sell my house or the rental) doesn’t seem to cut it in my scenario - even if I pay off the car, adding a third mortgage payment still has me well over the 45% required debt to income ratio. I don’t have any credit card debt.

When I bought my first rental, they figured in the potential rental income when doing their calculations but that didn’t happen this time (different lender, lower down payment).

The teacher’s salary part doesn’t help either…


Originally posted by @Maron Faulkner :

Applied for a 5/5 ARM with 10% down. But I didn't qualify due to my debt-income ratio. I already own one SFR in Boise plus my primary residence here in Portland, Oregon. So if I could figure this out, I would own a second SFR.
What the lender DIDN’T do was take future rent on the new house into account at all. They also prorated the rent on my Boise house to account for repairs and depreciation, which brought that number down to around $300, although in reality the rent there more than covers the monthly mortgage payment.

And voilà, I don’t qualify! Any tips? I am a school teacher at a private Catholic high school here so not rich, lol. But these sorts of experiences are getting in the way of my millionaire real estate investor status!

With 20% down, you could go for a DSCR loan that doesn't need income verification. Rates in the 4's on a 30 year fixed in many instances.

Just a thought.

Stephanie

 

Originally posted by @Maron Faulkner :

Hmm, true that they understand the situation better than I do! 

But reduction of debt (unless I sell my house or the rental) doesn’t seem to cut it in my scenario - even if I pay off the car, adding a third mortgage payment still has me well over the 45% required debt to income ratio. I don’t have any credit card debt.

When I bought my first rental, they figured in the potential rental income when doing their calculations but that didn’t happen this time (different lender, lower down payment).

The teacher’s salary part doesn’t help either…

I'm guessing that a big part of the problem is the debt of your primary residence in Portland in relation to that teachers salary. That combined with the low ratio of rents to property prices make high cost of living areas difficult to invest in. You may get good appreciation on the houses you already own, but may not be able to buy more.

 

@Maron Faulkner
You probably will have a hard time with this one. I am sure you could find a lender to count 75% of the income on the SFR. I know the banks are starting to cut back on lending with their liquidity requirement. Will counting 75% of the income of the house give you a DTI under 45%? Been awhile since I bought a residential property I thought DTI was suppose to be under 42%.

There are lenders out there who will lend on the individual property and it's cash flow rather than your personal finances. I'm not sure if I can name names, but Dominion Private Lending, Tital Loans, and Visio Lending are just a few that offer that product. I haven't used any of them yet, though.

Originally posted by @Kyler Pace :

There are lenders out there who will lend on the individual property and it's cash flow rather than your personal finances. I'm not sure if I can name names, but Dominion Private Lending, Tital Loans, and Visio Lending are just a few that offer that product. I haven't used any of them yet, though.

But that's part of the problem. It sounds like these properties wouldn't qualify when you take into account all actual expenses such as vacancy, maintenance, etc,.not just the mortgage.

Originally posted by @Nick Robinson :

@Maron Faulkner
You probably will have a hard time with this one. I am sure you could find a lender to count 75% of the income on the SFR. I know the banks are starting to cut back on lending with their liquidity requirement. Will counting 75% of the income of the house give you a DTI under 45%? Been awhile since I bought a residential property I thought DTI was suppose to be under 42%.

Thanks, Nick. 45% is what they're telling me. 75% of potential rent gets me closer, but not close enough. Now I'm thinking borrow less perhaps and put more down...

Originally posted by @Kyler Pace :

There are lenders out there who will lend on the individual property and it's cash flow rather than your personal finances. I'm not sure if I can name names, but Dominion Private Lending, Tital Loans, and Visio Lending are just a few that offer that product. I haven't used any of them yet, though.

Hey, Kyler, thanks for the suggestions, this sounds a bit like Stephanie P.'s DSCR loan idea above. This is my next step unless I get some traction pretty soon from one of my previous lenders.

 

Originally posted by @Eric James :

But that's part of the problem. It sounds like these properties wouldn't qualify when you take into account all actual expenses such as vacancy, maintenance, etc,.not just the mortgage.

Eric, you are definitely spot on that this may be tough since I'm dealing with Portland (and, to only slightly a lesser degree, Boise). 

I do have a pretty sturdy reserve fund tucked away for the rental house I already have, probably enough reserves for two SFRs actually. But when it comes to actual income, things get dicier.

And yes, both homes are gaining in value right now, but as I just read somewhere here on Bigger Pockets last night, that doesn't count for much till you sell...

 

Back end ratio for conventional non owner loan is 43% I assume you make $40000 a a teacher at a Catholic school or $3333 a month leaves $1433 monthly. I assume your IRS returns show a loss on the schedule C for your rental??? Two loan programs should work: Debt service ratio (you need the down payment and rents that the appraiser verifies on a schedule are used minus principle interest taxes insurance and any HOA. No haircut is given as in a conventional loan where 25% is automatically deducted from gross rents as general expenses. Second might be a BANK Statement Loan with this you supply 24 or 12 months bank statement (they generally only take ONE account) and the deposits are used less a ratio to determine your income. This is probably higher than what shows on your IRS returns as taxes are not used. If you don't deposit everything into one account, then start today. Funds from other accounts transferred don't count but your payroll check, rents and any other income do count.

@Maron Faulkner commercial loan should be an option - they usually don’t care as much about your personal situation and focus on the subject property. So that property will have to cover the mortgage payment after all expenses are accounted for. If it’s close, you may have to put more down as you suggested.

@Maron Faulkner ARM loans are not always easier to qualify for - they usually need you to qualify for the starting interest rate + 2%, or something similar. In other words, they want to know you'll still be able to make payments if the interest rate increases in the future.

Conventional lenders should be using 75% of the estimated rent, less the full monthly payment of the rental property you are purchasing.  If the number is positive, it's added to monthly income.  If it's negative, it's added to liabilities.  Other properties reported on the schedule E are calculated differently.  It sounds like you should get a second opinion from a different loan officer who is more familiar with financing investment properties.

Originally posted by @Caroline Gerardo :

Back end ratio for conventional non owner loan is 43% I assume you make $40000 a a teacher at a Catholic school or $3333 a month leaves $1433 monthly. I assume your IRS returns show a loss on the schedule C for your rental??? Two loan programs should work: Debt service ratio (you need the down payment and rents that the appraiser verifies on a schedule are used minus principle interest taxes insurance and any HOA. No haircut is given as in a conventional loan where 25% is automatically deducted from gross rents as general expenses. Second might be a BANK Statement Loan with this you supply 24 or 12 months bank statement (they generally only take ONE account) and the deposits are used less a ratio to determine your income. This is probably higher than what shows on your IRS returns as taxes are not used. If you don't deposit everything into one account, then start today. Funds from other accounts transferred don't count but your payroll check, rents and any other income do count.


@Caroline Gerardo

This is really interesting. Someone mentioned the debt service ratio loan earlier, but the bank statement loan is new to me. Right now, rent goes into a different account than my paycheck, but that's an easy fix. And yes to the schedule C loss. Thanks for the information. 






 

Originally posted by @Stephanie Medellin :

@Maron Faulkner ARM loans are not always easier to qualify for - they usually need you to qualify for the starting interest rate + 2%, or something similar. In other words, they want to know you'll still be able to make payments if the interest rate increases in the future.

Conventional lenders should be using 75% of the estimated rent, less the full monthly payment of the rental property you are purchasing.  If the number is positive, it's added to monthly income.  If it's negative, it's added to liabilities.  Other properties reported on the schedule E are calculated differently.  It sounds like you should get a second opinion from a different loan officer who is more familiar with financing investment properties.

@Stephanie Medellin

Thanks for the information. The loan officier said perhaps taking the rent of the new place into account was a possiblity, but only if there was at least a year's worth of rental history prior. Adding this kind of caveat to an already competitive, seller's market in Eastern Idaho - and everywhere - doesn't sound like a great idea to me. 

And yes, looking at another kind of loan may be what I have to do, not enough firepower (yet!) to qualify for the lower down payment and so forth. I understand that and think your idea of getting another opinion is great. In fact, as I mentioned to someone above, I already had a request into my previous lender. Thanks again.

 

Originally posted by @Tim Delaney :

@Maron Faulkner commercial loan should be an option - they usually don’t care as much about your personal situation and focus on the subject property. So that property will have to cover the mortgage payment after all expenses are accounted for. If it’s close, you may have to put more down as you suggested.

@Tim Delaney

Good advice, I have never ventured into commercial loans, but I have family members who have. Looks like you have plenty of experience with buying commercial property - I never thought of doing that, but maybe at least getting my feet wet with this kind of loan would be a good first step. Thanks.

 

@Maron Faulkner I have had this issue with large institutions because I am started the self employed journey 2 years ago. However I have a fantastic relationship with a community bank and they lend based on the asset not necessarily my income etc. they do look at it but they mostly look at how that asset is going to preform. Little tip, use the BP Calculators for rental property and print out the nice report at the end to show your homework. Also talk yourself up and really know what you’re talking about (without lying) creat that nice relationship and the sky is the limit!!!

@Maron Faulkner

I just had two lenders deny me because my DTI was too high at 53%. I've got a third lender working on it right now and getting a little creative. I signed a contract on another rental house to buy. So I hope he can come through! PM me if you want his contact info. He's an investor like us so he knows the game.

Working with investors is about 90% of what I do. 75% or the lease will apply when you don't have 365 days recorded of use in your taxes. Once you swap to using taxes there are a lot of tricks you can do to count more income, did you have cap ex? Additional depreciation? These can bump up your income ( lower DTI). Structuring the actual purchase/refi also is important. So are so many variables involved with investors, due to our creative nature. There's plenty of other guidelines (tricks) you can do to omit sent, lower monthly payments, etc.. to maximize your DTI.