Is rental income counted toward DTI?

18 Replies

Hi all - I'm looking to purchase my first investment property using a conventional loan. My current DTI is <40% and I have excellent credit so I don't foresee any issues qualifying (someone please tell me if I'm wrong on that, lol). However, looking ahead, I plan to BRRRR the property and refinance after 6 months. With the new property's PITI added to my debt, I'd be hovering really closely to 50% DTI and may exceed it depending on exact numbers.

So, can rental income from the property I'd be refinancing be counted towards my gross monthly income to offset the PITI? I've read lenders will let you apply 75% of your gross rent, and add (hopefully) the difference to your monthly income?

I've spent the last hour reading different posts and articles, but saw some contradicting answers so I thought I'd ask myself. Hopefully this is in the right forum. Thanks for your time! 

I believe they count around 75% of rental income...but they may also want to see the income for 2 years. All lenders probably have their own rules surrounding it, so it would be best to contact the lender you plan to use to refi. Or reach out to several and see who gives you the best terms. 

@Mel Adams

Why not refi into a DSCR and avoid DTI restrictions all together? Such a popular investor product at reasonable rates. They act very similar to a 30yr Conventional. Many investors run into one of two ceilings when growing; either the 10 property limit with fannie/freddie or DTI limits. DSCR eliminates both of these restrictions.

My company is based in Cali.  I don't do residential there, but have scores of folks I know who do.  I can hook you up with a few great loan officers in the Bay Area.  

Let me know.

Cheers!

Nick Belsky

Per Fannie Mae guidelines you are allowed to use proposed rental income to offset the the PITI payment of the new mortgage. There are some different rules about how much of that rent you can use. If you are purchasing in a lower cost market like Ohio/Mich/Indiana the proposed rental income usually offsets the entire new payment.

I will warn you a LOT Of lenders have overlays or additional rules surrounding this topic so be sure to ask the specific lender where they stand on this topic.  

@Chris Szepessy - the 2 years of income is what I was seeing a lot of differing opinions on. After reading Eric's comment I checked the Fannie Mae guidelines and it's 1 year of rental income history to be able to apply it to your gross income. Otherwise you can just use it to offset the PITI. I'll be sure to check with several lenders though on rates. Thanks!

@Nick Belsky - thanks! I'm not familiar with a DSCR, but I'll look into it. Sounds like a good option from what you've said. I'm actually moving to Southern California soon and will be investing out of state. Do you happen to know any lenders in the Birmingham, AL area haha?

@Eric Veronica - this was really helpful. I just read the Fannie Mae guidelines and it makes more sense, so thanks for mentioning that. If I have it right, you can only use it to offset the PITI, but any excess cannot be applied to your gross income unless you have at least a 1 year history of rental income. I'll definitely make sure I double check with lenders!

In most cases, yes you can use 75% of the anticipated rental income from the property you're buying. The only exception we see is if you do not have a primary housing expense (i.e. living rent free with family). So long as you have either a rent or mortgage expense you should be fine. This is for a conventional loan.

As Nick mentioned, you can also look at a DSCR loan. This is based solely off the anticipated income from the property you're buying. You could be unemployed and still qualify for a DSCR loan so long as the anticipated rental income meets or exceeds the monthly mortgage payment. (There are even programs where the mortgage payment can be greater than the rental income and you can still get approved.) DSCR programs are much less paperwork and tend to close more quickly than conventional loans. You can also close DSCR loans in a business entity rather than your personal name and rates have been pretty comparable to conventional financing lately.

@Mel Adams Correct on the rental history. The other requirement is having a current housing expense. So you cant live with mom and dad or live rent free and then count rental income in excess of offsetting the new PITI.

You've got some great lender advice in this thread, and have a couple of good options. It's pretty standard to be able to use a current lease agreement as well when you don't have a full year of history renting the property. We would just use 75% of the gross rent and use that to offset the PITI.

I'm in SoCal too, where are you looking to move to?!

Rents used on subject are the rental survey used by the appraiser when purchasing or refinancing to a GSE loan, with a 25% haircut for other expenses. Your income is generally the two year average of your net not gross on IRS taxes. Exceptions: you graduated from college and now work W-2 in line of work we can use offer letter and first pay check before closing; you are self employed and income is declining we use the lower YTD number; bonus can be used if employer states in writing it continues... and about 300 other variables. DSCR loan is stand alone product - no IRS income taxes or w-2 income used. The subject property cash flows on it's own generally at 75% loan to value.

@mel Adams 

yes depending on the lender , you can get 75 to 100% credit based on lease length and how you file your taxes. Rem, residential lending caps out at 50% dti. So unless you make 2x PITI it will affect you a negative way but the amount of damage is minimized. So 2k rents for a 1k PITI payment is a wash anything over is a plus and under gets hit

@Jeff Shumway this is great info! I rent so good to go there. Definitely going to look more into DSCR loans, sounds like a good option. Thank you

@Nick Belsky easy enough, I'll check it out. Thanks! 

@Eric Veronica got it, I rent so good to go there. Thanks for your help

@Brad Sneckner sure do and I'm glad it's a general consensus. Good to know about the lease agreement as well, thanks. I'm heading to San Diego! I'm from there, so moving back. You're in Riverside? 

@Caroline Gerardo thank you! I'm beginning to learn there's a lot variables like you said haha, so definitely going to make sure I ask all these questions when I get to choosing a lender. 

@Vince Rodriguez thanks for sharing!!

@Mel Adams yep you can and even when buying an owner occupied property you still get the rental income credit when it’s a multifamily. I.e. when you are house hacking a duplex, you live in one unit and you can count 75% of the income of second unit. The additional bit does help when house hacking especially in markets like mine, here in San Diego.

@Twana Rasoul oh nice, good to know. I'm actually moving back to San Diego next month. I looked into househacking there using an FHA loan, but I think it maxes out at about $750k? Hence why I'm opting to invest out of state for now haha, I don't have the capital yet to cover the difference.

@Mel Adams Welcome back!  I still house hack a multifamily myself.  Since you are thinking fha, the maximum loan amount in San Diego is $964,300.00 for a duplex...with the 3.5% down, about 35k, that gets you to a max purchase price of about $1M for a duplex.  I recently did a few of these house hack deals at the max $1M purchase price...one in Mission Hills and 2 separate sets of duplexes in Hillcrest area.

Funny, I just sold off all my out of state investments and purchased more here :)