Hey Chris, that is my point, you just increased your DTI by 10% with 1 property.
I would like to own multiple rental properties. What’s the way to go about adding more rentals to your portfolio without banks denying you because of your DTI ratio? What if you are cash flowing nicely on every house you own? Most loans would be around 80% LTV for me.
Will banks treat purchase to lease properties different than primary or second homes? In other words isn’t that how they do it for commercial property analysis? Basically see the ratio of rents to your costs to decide if the property is worth buying or lending on?
Thanks for clarifying Chris, although I think you spoke to soon. In your most recent post you proved my point! I have five properties, all cash flowing nicely, my income and expenses by themselves brings my DTI in around 35%. When you start adding my properties at 75% of the gross rentals and the PITI associated with them, my DTI goes up to 83%. By the way, if you had rents of $2,275 and PITI of $1700, your DTI on that property would be 100%. Therefore, given what your other income and expenses were, it would increase your DTI. Lets say for example your income was $5,000 and expenses were $1,750. My DTI is then 35%. When you add in this property my DTI increases to ((1,750 + 1,700)/(2,275*75% + 5000)) = 51.45%. Now keep the personal income and expenses the same, and add four or five more properties like the first; you see where I’m going! My explananation before was stating no other income or expenses, which is obviously never going to be the case, but was only for simplicity in proving my equation. I’m not trying to argue, I am enjoying reading all the posts and learning new things from other professionals! If you have any suggestions to somehow keep from my DTI from continuing to increase, please let me know. Did you have any more info on the requirements for blanket loans? I am getting ahold of a bank in my area shortly.
The only way to keep your DTI from increasing with each property is to buy at a large discount and rent at market value. I understand you are not trying to argue but your numbers are not correct. Your original argument was that banks double dip and that you had to make over 250% more income on the property than debt to actually qualify for several properties. Now your changing it to “it DOES have an affect on your DTI”. They are not the same argument. If you are renting it for $2275 and your payment is $1770 then the rent would wash away the debt and it would have ZERO affect on your DTI. Because the debt that was added would be almost the same as the income that was added so your DTI would stay the same. That is all I am saying. Another option to use is to go with No Ratio loans to buy your houses. Using this type of product your DTI is not considered just your credit, the LTV, and your assets are used to qualify. Finally, I have no more information on blanket loans. Call around your area and speak to some loan officers at local or regional banks.
Thanks for the info. Again, look at my previous post. What I meant by the bank double dipping is the fact that they are only taking 75% of your gross rents in addition to the expectation that with the property added into your DTI calc, that your DTI will stay w/in their criteria. The whole reason for the bank requiring a DTI of 50% or less is to factor in regular expenses from your personal life (groceries, utility bills, savings, etc…) The same thing is done when the banks take 75% of your rental income for operating expenses (water, sewer, maintenance, etc.). Therefore, to not double dip, the bank should net 75% of your rental income, net it against your PITI, and add or subtract that number to your personal income number. Then they should factor your DTI based on your personal expenses and your personal income plus the net rent income (75% rents - PITI). I don’t know how to explain this any easier! The banks do not “wash away the debt” with your rental income. The 75% of gross rents gets added to your personal income, and 100% of your PITI get added to your debt. Therefore, when you have a property with gross rents taken at 75% that equal or are close to the PITI on the property, this is going to negatively affect your DTI. Thanks for the help, I will be getting in contact with some people to try to find a no ratio product out there. I am assuming there are not many, if any, doing these on non-owner occupied three families; even with a 80% LTV.
There are 2 scenarios here both are completely different. Which is right? Still getting 2 answers.
Scenario #1. If the 75% of the rent pays the debt on a property it does not affect your DTI.
This would wash out the property and it is no longer added to income or debt on the DTI ratio.
Scenario # 2. The next is to add 75% of your rent to your Income on the DTI and your PITI amount to your Debt in the DTI. Let’s look at an example.
Debt currently: $2000 Income currently: $6000
House A Net Rent: $1000 House A PITI: $1000
If the property does not affect the DTI because the rent pays the debt then the DTI is $2000/$6000 = 33%. Your DTI Stays the same and the bank in this example does not count the property toward your DTI. It washes out as was mentioned earlier in this post.
BUT on the second scenario if you add $1000 rent to income and $1000 PITI to debt you get a completly different number. Here it is: $6000 + $1000 = $7000 debt. $2000 + $1000 = $3000
$3000/$7000= 43%. Your DTI goes up 10% in this example from the previous example. The debt therefore is not washed out even though the rent covers the debt payment.
Which one is correct? There is a HUGE difference between the two when you start buying and holding multiple properties. That is the question we are trying to get at.
Scenario 2 is correct. I own five properties and have watched my DTI get higher and higher. They in fact take 75% of your rental income and add it to your income, as well as taking 100% of your PITI and adding it to your debt! My properties generate between five and eight hundred dollars positive cash flow each, although my DTI keeps on going up with every property I buy. The suggestion to find lenders that do no ration loans is the way I may have to go, outside of finding private lending at this point.
Your DTI is only affected if the PITI is more than 75% of the rental income.
In the example you showed your DTI would be negatively affected by this property because you are having $1000 to your debt but only $750 added to your income. So your DTI would go from 33% to 44%. The only way for the property in the example to not have an effect on your DTI would be if you rented it for $1350. $1350 X 75% would be $1012.50.
And your acting as if I don’t understand what you are saying. When in fact I said this…
Yesterday.
I don’t mind conversation and trying to help people understand something that might seem difficult. But don’t act as if you have been trying educate me and I just was not getting it. I do this type of calculation all day everyday.
This…
Is much easier to understand than this…
Now that we have that settled. On to better topics. You should be able to find no ratio loans at almost any mortgage company. Although on multi-family you will most likely be capped at 75%. Although there are wholesale companies that will go to 80-90% depending on credit. You will need to speak with your mortgage broker to use them though as wholesale lenders do not deal with the general public. Hope this helps.
Forgive the fact that I didnt read through the entire post, a little head spinning. But I got as far as this quote from you and think I realize where you might be in error. The dti factor would change very little for that example. Your payment would be treated as a wash.
This is the way that a lender will calculate rental income.
Your Income = $5,000
Your expenses (without mortgages)= $1,750
subject properties:
Rental income x 75%
If this figure is a negative the defficiencey gets added into your expenses. If it is positive it gets added into your income.
Other properties:
Rental income x 75%
Same thing as above.
In your example if this was the subject property with no other properties factored in your dti would actually go down a bit. The difference of $6.25 would be added into your income.
$2275 (rent) x 75% = $1,706.25
Subtract out PITI of $1,700 leaves $6.25 of positive cash flow.
Your income is now $5006.25. Expenses still $1,750 (for those with additional property- any negative cash flow after the 75% factor would be added in here).
Dti 34.96%
Adding on properties that cash flow like your example would be fine. Where investors get caught up with dti issues is when properties are vacant, rates too high, or over leveraged.
InvestmentLoans, I agree with you but so many other brokers and loan officers are adding 75% of the rent to income and the mortgage payment to debt. In almost all cases this raises the DTI significantly even on an income producing property.
I even called Countrywide today and the loan officer thought that is how they did it. After a lot of debate I will be talking to the branch manager on monday to try and confirm how they calculate their DTI with income producing properties.
On an income producing property it is either income OR debt only, right? Why do so many people factor it in like a NON-INCOME producing property??
How can something so important be so misunderstood by professionals?
Don’t forget reserves. I have a client that we are refinancing his #10 property but he needs to have 6 mos PITI per property. Luckily my guy has it but that’s a lot of moolah.
Investment Loans, I see how you calculated the DTI, although all the lenders I have spoken with calculate it differently. They add the debt shown in your credit report (the mortgage on the subject property) to your total debt, then they take 75% of your rental income on that property (taken at 75% to compensate for operating expenses) and add this number to your income (or subtract it from your income if it comes out as a negative number). The income therefore does not wash out your debt due to the fact that lenders require you to maintain a DTI ratio of, say 50% or less (usually must be lower than 50% give or take 10% depending on the lender). The reason I have been told for this calculation is that since the properties are considered residential and not commercial in nature, they use it to calculate your DTI in the case that all your tenants decided to not pay rent/move out and you had to pay for all of the expenses out of your pocket. That is why they are asking for the DTI to be under “50%” to factor in such rare occurences. The problem I have with this is that I am a seasoned investor with five properties and have been fully occupied for the past two years. The risk that the bank is factoring for would be understood if I just bought my first investment property and didn’t have a track record of earning income on these properties. In addition, I have economies of scale; whereas I have four other investment properties that supply me with positive cash flow on a monthly basis in addition to my full time job. Let me know your thoughts.
Whoever is giving you the information is incorrect. Income from rental properties is not calculated like that.
For existing (non subject properties) 75% of the lease income is used. Or if going full doc, the schedule C income is used if the property was reported on the most recent filed return.
The total PITI is then subtracted from that. If the result is positive then that would be added into your income. (at this point the mortgage payment is already accounted for and should show back up in liabilities)
If negative this figure gets added to your liabilities. (at that point you would not any any type of income from rental back into the income side)
For the subject property a couple things need to be considered. Many lenders have a 2 year landlord history. If you dont have the 2 year landlord history then the income for the subject property has to be left off. (not all programs are like this but most are).
If there is a 2 year history and income is used then use 75% of the rental income (or if full doc use tax return schedule C). The same forumla as above applies…75% of rent against full piti…positive added to income, negative added as liability.
the information is what I’ve been receiving from the lenders I’ve been dealing with. Please let me know of several lenders that calculate DTI your way, so I can contact them for my future financing needs!