I am banging my head into a wayll when trying to get a HELOC on one of my rental properties. :banghead
Can someone confirm the property way to calculate debit to income.
Using some sample numbers
Regular Jobs salary - $8,000 per month
Mortgage on Personal Residence - $3,000 per month
No Other personal debit
Rental Property Make $10,000 per month
Mortate On rental property is $5,000(includes taxes/insurance/principle/interest)
Bank mentions that they discount rent 75% for vacancy allowance.
Method A
Take 75% of rent or $7,500 and subtract $5,000 mortgage leaving me a net profit of $2,500
Add the $2,500 profit to my $8,000 a month giving me total net income of $10,500
$3,000/$10,500 = 28%
Method B
Take $8000 Salary and add $7500(75% of rental income) to get = $15,000 Income
Take $3,000(mortgage on personal residence) + $5000 (mortgage on investment property) and get $8,000 in debit
$8,000/$15,000 and get a debit to income of 53%
Investment Loans is correct as Method A is the proper way to calculate debt to income. Unfortunately, I have found that a lot of banks calculate it via Method B. I have went into great detail explaining why method B is incorrect, although the underwriters have not changed the way they calculate it. Hopefully you find a bank that calculates it correctly. The main reasoning for Method A being correct is due to the fact that when they set guidelines for your debt to income being under 40%, for example, is their way of giving a cushion for all expenses that don’t show on your credit report. Therefore, they are essentially doing the same thing with your rental income when they limit it to 75% of the income.
Kkeifer
Unless you are referring to smaller banks or portfolio lenders the loan origination software should be calculating it for you and the UW. If you are using a broker it may be that they don’t understand how to calculate income. Scary.