Financing Dilemma - How to qualify for a new primary mortgage?

9 Replies

Financing dilemma - How to qualify for a new primary mortgage when you have rental properties financed?

As you get more rental properties, your income increases, but you still have to deal with DTI ratios. Let's say you have 5 properties and are making $150k with all your income, including your regular job. Even though you're making $12.5k a month, that's still only $6.2k a month you can use with a 50% DTI ratio. Add in the mortgages for your current properties and let's say that eats of $4.5k of that available 50% DTI.That leaves only $1.7k available to work with even though you still have a whole other $6.2k that won't be considered for usable income.

For the sake of argument, let's say the person was making half that for a total of $6.2k a month with no current debt... they would actually have $3.1k to work with even though they would have less income left over when purchasing. Pretty ridiculous.

As a real estate investor, what are options for someone who makes a lot, but is breaching past the DTI ratio for purchasing a primary residence?

Are there any financing options that don't take DTI ratios into account with a low down payment and interest rate? Or is it an option to use a no doc rental loan if I'm going to be renting out part of the house, but still living in it?

Why aren't you adding rental income to your DTI calculation? Does the rental income show up on your tax return, schedule E?

Find a lender knows how to calculate income from investors and self employed, you'd be surprised how many do it wrong. This is the only way you will know your true DTI.

I think many people already have a primary residence by the time they buy a rental.  Talk to a few lenders.  It won't matter how many properties you have, the thing lenders will look at is your income and debt. Try for as long of a mortgage as possible to have lower payments.

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Originally posted by @Jesse Rivera :

Why aren't you adding rental income to your DTI calculation? Does the rental income show up on your tax return, schedule E?

Find a lender knows how to calculate income from investors and self employed, you'd be surprised how many do it wrong. This is the only way you will know your true DTI.

I am adding it, but apparently my CPA didn't list the number of rental days down and I purchased a property half way through the year so it looks like like I have a loss.

Originally posted by @Theresa Harris :

I think many people already have a primary residence by the time they buy a rental.  Talk to a few lenders.  It won't matter how many properties you have, the thing lenders will look at is your income and debt. Try for as long of a mortgage as possible to have lower payments.

I do have a primary, but the thing is that I want to upgrade and turn my current primary into a full rental. I'm already renting portions of it out and want to rent the room that I'm currently in once I get my new primary. 

Originally posted by @Anthony Webster :
Originally posted by @Theresa Harris:

I think many people already have a primary residence by the time they buy a rental.  Talk to a few lenders.  It won't matter how many properties you have, the thing lenders will look at is your income and debt. Try for as long of a mortgage as possible to have lower payments.

I do have a primary, but the thing is that I want to upgrade and turn my current primary into a full rental. I'm already renting portions of it out and want to rent the room that I'm currently in once I get my new primary. 

 I'd talk to your bank and find out how much you can borrow.  You might be surprised. Lots of people with rentals have more than one mortgage and the way you are doing it is pretty smart as your living costs are probably completely covered by your tenants along with your mortgage.

Get your rentals into an LLC and commercial lending - off of your personal name. Commercial loans wont look at DTI as much as long as they are cash flowing. Plus generally on personal name, you'll need 2 years of rent before allowing to claim it as income (Can defintiely find local credit unions that'll get creative and work on partial claiming)

@Chris Mason has a good summary of how DTI is calculated for rentals so maybe he can chime in here.

Basically a cash flowing rental will improve your DTI not hurt it. The rental loans should be accounted for with the rental income first, and then the net is added or subtracted from your monthly income. E.G $1,200/mo rental has an $700 mortgage and $300 in other expenses, there should be a net $200/mo added to your income. You don't then take the DTI of your income and all those liabilities because the rental mortgages were already accounted for by the rental income.

Originally posted by @Anthony Webster :
Originally posted by @Jesse Rivera:

Why aren't you adding rental income to your DTI calculation? Does the rental income show up on your tax return, schedule E?

Find a lender knows how to calculate income from investors and self employed, you'd be surprised how many do it wrong. This is the only way you will know your true DTI.

I am adding it, but apparently my CPA didn't list the number of rental days down and I purchased a property half way through the year so it looks like like I have a loss.

I have a "top 3 things to do and not do" presentation for CPAs with REI clients, and that's one of the items. You purchased the property in November, but had 365 'fair rental days' out of those last 2 months in the year? Hmmm. I guess that means next year, I should expect to see that you got 2190 fair rental days out of it in 1 year consisting of 365 days? Excellent job, please share that trick with me! :P

Jokes aside: 

For context, there's a wide range of values for 'fair rental days,' and anything in that wide range (tax pro could chime in, IIRC it's 15 days to 365 days) results in the exact same tax bill for many scenarios. So if we conceptualize the CPAs job as a) preventing audits while b) saving you as much money as possible, then it follows that from that POV c) it makes zero difference if it's 30 or 180 or 365 fair rental days, so it's not on their radar to be exact with. Some CPA software packages default to 360, some default to 365, but that auto-populate will remain unless it's manually changed. 

Something proactive the lurker can do is, when giving all your paperwork to your tax professional, include the dated settlement statement from the purchase and specifically communicate that you want 'fair rental days' to be accurate, even if it makes no 'tax difference.'

Pragmatically, OP, many lenders understand this gap, and if you share your settlement statement with them, they will at least only be dividing by the number of months you owned it. This still isn't perfect, b/c it may have taken a month for you to turn the property over and put a renter in, but if the real number is 6 months, it's better that they divide the rental income by 7 months than 12.