Rental Income & DTI Question

Hi Everyone,

I am a newbie to this site and to real estate investing. Three years ago I purchased my first property - two bedroom/two bathroom condo where my husband and I now reside. In the next 5-8 years, we would like to purchase a single family home in the area and convert the condo to a rental property (selling will most likely not be an option due to the downturn in market values). However, in the interim we are exploring purchasing rental properties as long term investments.

I heard that with the tightening of underwriting guidlines due to the economic downturn that lenders now require you to have sufficient personal income to cover not only the mortgage for the property that you will occupy but also to cover the mortgage(s) of your rental properties when calculating your DTI. I understand that before that they would count rent from the rental properties as income - but that is no longer the case.

Here is my question: 1) Is this true and if so is it true across the board? 2) If that is the case, how would we structure the ownership of our rental properties so that when the time comes we will have sufficient DTI to purchase the SFH that we would like to have for us and our children?

Please advise. Thanks.

I recommend exploring commercial loans and not worrying about the latest Fannie Mae guidelines. Commercial loans will generally require a larger down payment but you won’t have to worry about maxing out your loans at 4, 10, or the current limit at the time. A commercial loan will likely be a fixed interest rate for 3-5 years and amortized over 10-20 yrs depending on the lender. All of our business loans are structured this way. Each time, we sign a paper personally guaranteeing the loan and they show up on our credit report as being a guarantor, but not being solely responsible.

Justin – Do you file your commercial loans on your business taxes and not on your personal taxes? Does that help your dti?


Here is the link to allregs which is the company that Fannie Mae contracts with to show their guidelines.

Here is FHA’s underwriting link on this question.

Here is the other link through FHA as well.

And lastly, here is a copy of one of investors guidelines when it comes to vacating the existing owner occupied home to make it a rental, when going to buy a new owner occupied home.

Rental income from borrowers intending on vacating their current primary residence will not be considered even if they can document 30% equity.
For rental income to be used to qualify on investment property transactions, it must be reflected on the borrower(s) filed tax returns. If rental income is not reflected on the 1040’s, the full PITI must be used to qualify. The full PITI must be used for the subject property and all of the investment properties owned if not reported on the borrowers filed tax returns.

Considering your looking down the road 5-8 years, consider the fact that a lot can change between now and then. If you want to be assured you wont have an issue with underwriting, I would then be in a position that you have 25-30% equity in your condo by then, and be able to qualify with both payments without counting the rental income. Oh and you must also have 6 months PITI reserve for the condo as well.

They still apply 80% of the rental income to your income so that the rental doesn’t really stop you from getting another mortgage. What hurts most of the people that I talk to is the cash reserves requirement. They now require 6 months of PITI to be held in cash reserves for each mortgage that you have. If you have 10 houses with a PITI of $600 each and your personal residence has a PITI of $1200 you need to have an account with $42,000 in it.

I advise them to show their 401k account summary to show cash reserves. That has worked in the past.


To clarify on my earlier post as well as Bluemoon06 post. Really simply here are the general guidelines from FHA, Fannie /Freddie:

If you have a 2 year history of owning and operating rentals showing on your tax return and you want to vacate the existing home and make it a rental, they will count any income that you will have on that newly rented property so long as you have a rental agreement in place prior to funding on your new home. They will hit the rental income with a 75% vacancy factor and then subtract the PITI from that number. If it ends up a positive number, then you have income, if its negative then its a liability that gets calculated as part of your debt ratio. If you dont have a 2 year history showing on your tax returns then you cant count the rental income.

Keep in mind that the 75% equity rule applys at all times, if your vacating your existing residence to make it a rental, and you are buying a new owner occupied home, you must have 25% equity in your existing home, if you dont, they wont count the rental income at all, and you then must have the ability to cover both mortgages with out exceeding the debt ratio guidelines.

Oh and one other thing, be prepared for the lender to require that you pay for an appraisal on the existing property, if your loan balance isnt 25% lower than the original purchase price.

The business income/expenses are filed on the business return. We haven’t made any large non-REI purchases except for a small auto loan earlier this year. We didn’t have any problem getting that. Our banker has told us we could have potential creditors contact him directly if they wanted an explanation of our loan situation.