Is rental income counted toward DTI?

Question

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!

Jeff Shumway · Answer

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.

Eric Veronica · Answer

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.

Nick Belsky · Answer

@Mel Adams

https://findamortgagebroker.co...

Nick Belsky · Answer

@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

Seth Wilcock · Answer

Hi Mel,

75% of the gross rent (as determined by the Appraiser at the time of contract) can be used to help offset the new housing expense and lower your DTI on an investment property transaction.

Nick Belsky · Answer

@George Molev

George, if you are under and LLC, I can help you in GA.  If not, check out https://findamortgagebroker.co...

Cheers!

Nick Belsky

Brad Sneckner · Answer

@Mel Adams Nice! Yeah I'm in Riverside. I have a number of clients down in SD and Oceanside/Carlsbad so we'll have to try and connect! Give me a shout when you're settled.

Twana Rasoul · Answer

@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 :)

Mel Adams · Answer

@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.

Twana Rasoul · Answer

@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.

Is rental income counted toward DTI?

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