All Forum Posts by: Philip Johnson

@Philip Johnson hey Philip-

Debt to income ratio is what lenders use to determine wether or not you’re capable of repaying a loan.

An example of a 48% DTI would be if you had 10,000 in monthly income, and all of your existing monthly debt plus the new loan your applying for totals $4,800 per month. $10,000/$4,800=48%

to make it more confusing there is also front end DTI and back end DTI- front end dti includes only your housing expenses while back end includes all lines of credit, housing, car payments etc. many lenders can get up to a 50%-57% back end DTI on residential loans, and 35-46 front end DTI.

if your dti is too low you have 2 options, Lower your expenses, or increase your income. I would bring these questions to your loan officer who I'm sure will want to help you qualify and they can go into specifics. But in general if your DTI is too low you will want to take measures to increase the income you show, which may mean being less aggressive on your tax deductions.

Hope this is helpful, good luck!

So, the comment I made about deductions being optional was contradicted in this thread later, and then agreed to later after that...so...there you go for internet advice. Seeing as the contradiction was backed up with a direct source from the IRS, I'm going to go with that. That means the comment I made about deductions being optional is wrong, per my interpretation - lol. When it comes to the IRS, or peoples interpretations of the rules, I always reserve the right to be wrong, and always keep in mind the IRS doesn't always get it right either!!! If they did get it right all the time, there would be no need for tax lawyers.

My number one tip is to keep an accurate record of every penny in and out. The second is to not delay in doing your taxes.

@Philip Johnson In simpler terms, if you earned $100, then your debt is $48. 

Not to get into the particularities of the tax filing and what you should report. I think there are enough CPAs on this thread to help with that 🤗

Essentially, lenders like to see 33 or lower. 

@Frank Chin and others here, see my tip re jumping from FANNIE / DTI rental lending to portfolio / softmoney DSCR (non W2/DTI) lenders. No loan limit, easy reserves requirements which are ownerous with FANNIE loans as loan count goes up your reserves can be killer, and Finance of America the last loan a friend got was excellent interest/LTV: 6.xx% and 75% LTV. Your terms will be FICO/DSCR/LTV based. Dump these irritating banks.

Search for asset based 30yr rental loans, Lima One, Finance of America and local brokers with softmoney lenders terms vary widely. I have 2 of these, DSCR 1.8 gushes cash flow, higher interest rates are ok as long as you bought right. After all we are in historically low interest rate env. Over time your deal buying will have to work with higher interest rates so get used to tuning your offers based on expected DSCR: $rent/$PITI+HOA Keep this >1.5 for safety or higher for cash flow.

Legally you should report all income and expenses related to your business and or rentals or it's filing a fraudulent tax return. 

There are ways to legally choose if something is capitalized vs expenses, which year purchased ect to control reported income. 

But no, you can't just pick and choose what you report. 

I can't speak to the lending/underwriting aspect, but for taxes you don't have a choice WHERE to report these things, as far as the IRS is concerned. You can choose IF you expense repairs or maintenance or any expense for that matter, save for depreciation. Now, you could elect to not expense depreciation however, you would be shooting yourself in the foot, as when you sell the IRS says you must account for all depreciation taken, or should have been taken. Therefore, you could make that play on the front end to help out with getting a loan (I think? Maybe the lending rules prohibit that???), but you would be trading that benefit for a loss on the back end. Maybe you knew all that.

I think an important thing for anyone to consider here, is if you decided to not expense something to make your numbers look better, the amount lost in taxes paid is going to significantly add to the cost of credit. Good luck!

Let been through the same thing with DTI's. It's frustrating, and funny at the same time.

I bought my first rentals in 1983, when interest rates were 13% to 14%, and when they dropped to 7% by 1993, I figured it's time to refi. With mortgages totaling $300,000, a reduction of 7% means $20,000 more in cash flow. I was cash flowing already at 14%, so getting mortgage at 7% should be a no brainer, right? Think again.

I applied for two mortgages at an S&L, no cash out, as they suggested that would make it easier. One of them was approved in about two weeks. The other ones was hung up, and two months later, they're still working on it. Sounds strange?

It turns out I bought the first two rentals with my mom in law, and we're able to put good down payments for cash flow. For instance, we put down $100,000 on a $180,000 triplex in 1984 for cash flow reasons.

Long story short, my mom in law was retired, no W2 income. But she paid all cash for a triplex she lived in. Beside investing with us, she invested with her son who's a doctor, two more triplexes in San Francisco. She still had a few hundred thousand in the bank. What's the hang up? With all the mortgages, mom in law with no income, not counting my brother in laws income on the properties he co-owned with my M-I-L (but counting the mortgages), my DTI was sky high. So the answer is to add in my brother in laws income, right?

Well. it gets more complicated. He invested with some fellow doctors, so besides looking at his schedule E's, they have to look at his investor friends. Well, it looks like we'll have to look at half the doctors in San Francisco.

What finally happened? We wife happened to chat with our financial advisor at Citibank where we had our "wealth account". After she told him the whole story, he said "let us do the mortgage". What Citibank did was the common sense thing, they did the mortgage without involving my mother in law, brother in law, and half the doctors in San Francisco. With our DTI alone, it's a breeze.

As others have said, some banks got stupid rules, so you'll have to get another bank not so stupid. We paid for two application fees, and two appraisals. But with $20,000/year in extra cash flow, that's just a blip.

Also, at the time, it was suggested we find ourselves a mortgage broker, but at the end, we didn't need one. We also checked out "no doc" loans at the time, with a higher interest rate in 1993, but still lower than the 14% we were paying at 1983 interest rates. 

I don't think it was correctly mentioned above, that most banks do NOT know how to underwrite a rental loan especially when the borrower has many Sched E.  Underwriting should add back depreciation!!  Most don't know to do this.  Plus other factors that it pays to use lenders who are investor friendly.   

One also learns who is a good closing Attorney, bank, contractors from being a member of all of the local REIAs.   Joining the local REIAs is the best tip I have, they are "doers" in the local zips, contractors, services, agents etc.

I have several 50 state lenders I have used that I can give you to check out.  But BP's arbitrary deleting posts policy makes me frustrated so if you want the lenders I feel will give you a better shake on your rental loans PM me..  

I think I can mention names;  swbc.com , finance of america are 2 national lenders.  Google local contacts.

Its 43% DTI above, a typo, that said 33% and thats not true either. Every institution has their own "overlay" on top of FANNIE that can move DTI up or down, some go as high as 50% depending...

Non DTI lenders: once you have a few FANNIE loans even way shy of the max 10 you run into these DTI and not mentioned yet "reserves" limitations. You can then jump to the asset based 30 yr lenders: DSCR >1.3 ish. Too low in my book, only do deals that DSCR >1.5 ideally for my deals >1.7. Higher interest rate, points etc, but at least these guys don't need W2 or DTI, just min FICO guessing 650, higher LTV so more down payment, some as high as 75%, one I;ve seen 80% but I bet that has catches..

Asset based rental lenders: Lima One, Finance of America and more local "soft money" lenders who you'll find out about at your local REIA and broker/lenders. No need to fret your buy and hold days are over jump to asset based 30 yr lenders.

Say you claim 10k under line 18 which is depreciation.  You can add that 10k back to make your line 21 more positive of number only for loan purposes.  Lines 18, 16, 12 and 9 can be added back safely, sometimes 19 but that gets tricky.  When an underwriter that writes to Fannie and Freddie guidelines computes the shc E calculation they will add back these line items to make line 21 a higher number.  Then divide that number by the months your investment home was rented for.   If that number is higher or lower than your P.I.T.I payment then your positive or negative on that property for Lender purposes.