Does owner finance payments offset debt to income ratio?

4 Replies

Yes, it should. This is one reason it's important to keep good records that can be shown to a lender to prove the payments are being made.

Some lenders may not take it into account, but I haven't come across any that don't.

@Frederick McCarty I need to help with some clarity here if this is a loan related question and the answer depends on what TYPE of loan the seller is seeking on the next property.

Generally speaking there are 2 main types of loans for investors: “Conventional” and “Portfolio”

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different.

I say all of this because Fannie/Freddie will require your "Schedule B" income to be claimed for 2 years in order to count it...AND you will have to prove that it will continue for an additional 3 years at minimum. So if you sold a house with owner financing, and you are earning interest on the loan...that interest is claimed on "Schedule B" of your tax returns. If your Note is just a 5 year note....then that income would never be able to be counted for Fannie/Freddie purposes. Because it would take 2 years to show it on the tax returns, and then 3 more years would be needed. I hope that makes sense.

However, none of this may even matter to a commercial/portfolio style loan.  But the rates and/or terms will be different.  Thanks!