Best strategy to lower DTI for a mortgage loan

Nico Ferreri · 2022-08-01T18:17:30-07:00

Hello BP Forum! I'm pretty new to this industry, but have been soaking up a ton of info all summer reading BP books and listening to podcasts. I have a few personal finance questions regarding my student loans and my goal to lower my back end DTI. Im 24 years old. I have about 100k in student loan debt between my private (4.2% rate) and federal loans (I wish I made a better decision with college but cant change it now!) My monthly payment in student loans for the foreseeable future (10 years) is going to be around $800/month. I have about 26k in my savings account at the moment and around 7k in the stock market. I'll be making around 55k with my W-2 teaching job. In summer 2023 when my girlfriend and I move to the city that she chooses to go to PA school, we will be looking to purchase a small multifamily property and house hack. My only worry is that with her having no income while in school, my DTI will be too high to get approved for an owner occupied low downpayment loan. My estimate is that my back end DTI will be around 50%. I know the Dave Ramsay method is to pay off debt as fast as possible, but then again I've heard investing that money instead is a better option. What should I do? Use 10-15k of my savings and take a chunk off my student loan debt? Refinance private loans to longer term period so the monthly payment is lower? How much of a factor is DTI? Especially if I have a good credit score, I'd have around 30-35k savings by next year (and my girlfriend will have around 30-40k in savings as well. Do those compensating factors outweigh a bad DTI? AAny advice would be greatly appreciated!

Sergey A. Petrov

Real Estate Consultant · Seattle, WA · Member since 2022 · 1k+ posts · 784 votes

4y

50%+ DTI is the killer. Refi your student loans to longer terms if you can (don't know if that is possible) so long as the interest rate isn't much higher. Find a lower priced property (lower monthly payment to count towards your DTI). Save more money for a larger downpayment (again lower payment). But of all those, the best option is to get a second job. Drive uber, pick up an evening shift at McDonalds, do something else to increase your income. There is a reason, 50% DTI is the killer. It usually means you are trying to buy something you can't really afford

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Rob LawrenceBusiness Member

Real Estate Agent · West Chester, PA · Member since 2017 · 266 posts · 94 votes

4y

They may look at your student loans and use 1% of them. But I’d try to straighten out your debt before taking on more. Just pay it off and get rid of it.

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Alicia MarksPro Member

Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes

4y

These are all great suggestions. I'd also check with lenders about using the potential rental income to qualify if it's a multifamily property. Many lenders will use 75% of market or lease paperwork to help you qualify. You'd still need to either lower DTI or bring more cash to close as well.

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Matthew CrivelliBusiness Member

Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes

4y

You can use private investment loans if you have cash to work with and don't mind buying properties under the name of an LLC. Rental and rehab loans are available. Hard money is not looking at DTI, income, or employment but the down payment will not be low like a home loan. Not a bad option. @Nico Ferreri

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William Joel Idleman

Financial Advisor · San Antonio Texas · Member since 2022 · 100 posts · 53 votes

4y

You have to figure out what level of risk you are willing to take to get the results you want. First, you need to figure out what your goal is for that property after PA school is complete. Real estate generally goes up but she could be graduating in a down year and you're stuck holding it.

Private loans may not offer an extended payment period. However, it's still worth asking. I'll tell you what I did because I'm in the same boat as you.

I had cash available to pay down my students loans by about 10% but not pay them off (90k). I extended them out using income based repayment. Yes, I'm a financial planner. Yes, it's dumb to have that much in student loans without a better major. No, no one gave me any guidance along the way so I made dumb choices as a kid. I digress. It wasn't going to change my lifestyle or lower my payment. Student loans just feel like a weight around our necks and they really can destroy one's ability to dream about the future. If I paid them off as quickly as I could it would take me at least 5 years. I don't mind delayed gratification but I'd like to live life along the way. So I moved my money into real estate.

I bought a small property for 150k that cash flows $200/month and the loan gets amortized at about $200/month the first year. My student loan payment is $400. I'm already used to paying it so I just keep paying it and I put the $200 in a separate account to help with maintenance and the next deal. This is a risk I'm comfortable with taking.

In 5 years at 6% appreciation (which I think is conservative but we will see) the property will be worth almost $190k. The mortgage will be paid down to about $137k. That will pay about $53,000 toward my student loans (not including taxes if I sold). I will most likely try to do a cash out refi at that point. So now I'm looking to purchase my second property and repeat this strategy every year. It's not flashy. It's not crazy profits. It's conservative but once again that's the level of risk I'm willing to take right now.

If you can find a multi family that can do the same for you and you're okay with the risk then get after it. If you're not okay with the risk then you should probably rent or find a different strategy.

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Nico Ferreri

OP

Dayton, OH · Member since 2022 · 6 posts · 4 votes

4y

Quote from @William Joel Idleman:

You have to figure out what level of risk you are willing to take to get the results you want. First, you need to figure out what your goal is for that property after PA school is complete. Real estate generally goes up but she could be graduating in a down year and you're stuck holding it.

Private loans may not offer an extended payment period. However, it's still worth asking. I'll tell you what I did because I'm in the same boat as you.

I had cash available to pay down my students loans by about 10% but not pay them off (90k). I extended them out using income based repayment. Yes, I'm a financial planner. Yes, it's dumb to have that much in student loans without a better major. No, no one gave me any guidance along the way so I made dumb choices as a kid. I digress. It wasn't going to change my lifestyle or lower my payment. Student loans just feel like a weight around our necks and they really can destroy one's ability to dream about the future. If I paid them off as quickly as I could it would take me at least 5 years. I don't mind delayed gratification but I'd like to live life along the way. So I moved my money into real estate.

I bought a small property for 150k that cash flows $200/month and the loan gets amortized at about $200/month the first year. My student loan payment is $400. I'm already used to paying it so I just keep paying it and I put the $200 in a separate account to help with maintenance and the next deal. This is a risk I'm comfortable with taking.

In 5 years at 6% appreciation (which I think is conservative but we will see) the property will be worth almost $190k. The mortgage will be paid down to about $137k. That will pay about $53,000 toward my student loans (not including taxes if I sold). I will most likely try to do a cash out refi at that point. So now I'm looking to purchase my second property and repeat this strategy every year. It's not flashy. It's not crazy profits. It's conservative but once again that's the level of risk I'm willing to take right now.

If you can find a multi family that can do the same for you and you're okay with the risk then get after it. If you're not okay with the risk then you should probably rent or find a different strategy.

Thank you for this! I think we are definitely in the same boat but you are a bit ahead of me. The plan after she graduates from PA school would be to rent out the side we live in and keep it as a LTR. Are you saying that instead of using the cash you had available to pay down 10% of your student loan, you used that to finance your 150k property? Since I have a little bit more in savings, I could probably pay off 10% of my student loans with a lump sum payment and still have enough savings between my girlfriend and I to put down a downpayment, especially if its a low downpayment owner occupied loan. Would paying off 10% of my loans even make a difference in my monthly payments you think to lower my DTI? Or would it be more wise to use that money to put down a higher downpayment since a higher downpayment would probably be required with such a high DTI?

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William Joel Idleman

Financial Advisor · San Antonio Texas · Member since 2022 · 100 posts · 53 votes

4y

Quote from @Nico Ferreri:

Quote from @William Joel Idleman:

You have to figure out what level of risk you are willing to take to get the results you want. First, you need to figure out what your goal is for that property after PA school is complete. Real estate generally goes up but she could be graduating in a down year and you're stuck holding it.

Private loans may not offer an extended payment period. However, it's still worth asking. I'll tell you what I did because I'm in the same boat as you.

I had cash available to pay down my students loans by about 10% but not pay them off (90k). I extended them out using income based repayment. Yes, I'm a financial planner. Yes, it's dumb to have that much in student loans without a better major. No, no one gave me any guidance along the way so I made dumb choices as a kid. I digress. It wasn't going to change my lifestyle or lower my payment. Student loans just feel like a weight around our necks and they really can destroy one's ability to dream about the future. If I paid them off as quickly as I could it would take me at least 5 years. I don't mind delayed gratification but I'd like to live life along the way. So I moved my money into real estate.

I bought a small property for 150k that cash flows $200/month and the loan gets amortized at about $200/month the first year. My student loan payment is $400. I'm already used to paying it so I just keep paying it and I put the $200 in a separate account to help with maintenance and the next deal. This is a risk I'm comfortable with taking.

In 5 years at 6% appreciation (which I think is conservative but we will see) the property will be worth almost $190k. The mortgage will be paid down to about $137k. That will pay about $53,000 toward my student loans (not including taxes if I sold). I will most likely try to do a cash out refi at that point. So now I'm looking to purchase my second property and repeat this strategy every year. It's not flashy. It's not crazy profits. It's conservative but once again that's the level of risk I'm willing to take right now.

If you can find a multi family that can do the same for you and you're okay with the risk then get after it. If you're not okay with the risk then you should probably rent or find a different strategy.

Thank you for this! I think we are definitely in the same boat but you are a bit ahead of me. The plan after she graduates from PA school would be to rent out the side we live in and keep it as a LTR. Are you saying that instead of using the cash you had available to pay down 10% of your student loan, you used that to finance your 150k property? Since I have a little bit more in savings, I could probably pay off 10% of my student loans with a lump sum payment and still have enough savings between my girlfriend and I to put down a downpayment, especially if its a low downpayment owner occupied loan. Would paying off 10% of my loans even make a difference in my monthly payments you think to lower my DTI? Or would it be more wise to use that money to put down a higher downpayment since a higher downpayment would probably be required with such a high DTI?

That's a great question and best to be answered by a loan officer. I can tell you what I would personally like to do but you're right. You need to do what will position you best for acquiring the property which may be a combination of both like you mentioned. I'm sorry I can't be of more help but if I gave any more advice it would be inaccurate at best.

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Best strategy to lower DTI for a mortgage loan

Best strategy to lower DTI for a mortgage loan

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