This will potentially be my first deal. Any input is appreciated. I have a seller who owns two properties: the one he lives in and the one he may L/O to me- a rehab he over paid for (total cash in property a little under market value, according to comps I checked) and is having trouble unloading. He wants to L/O the investment property to me, sell his residence, and use the proceeds from the residence sale to buy a new property in another town to live in. He was told by a mortgage broker that with the note on the investment property still in his name, even though he isn’t responsible for the payments, his debt/income ratio might not allow him to purchase a home in the other town. Any thoughts on this. Is there a good answer I can give him to alleviated that worry? I may be his best option regardless, but I’d like to know his options one way or the other. I’ll give more information if needed. Thanks in advance.
If by maxed out you mean not having equity, it has some: About 15K as is today if I figured the market value right. The seller figures its less, but even if the value is what I get an option for I’ll still sell it to t/b for what I expect it will be worth in a year or so and collect a deposit and the cash flow. Any thoughts on the seller’s concern about the debt/income ratio?
I’m not an expert on this and I don’t know if all lenders do this, but when I applied for loans in the past and had properties on my DTI, I would produce a rental contract showing that the property cash flowed, making it more of an assest than a debt. In most cases the lender would take the property out of my DTI. I had this done on a couple of deals. Oh, and just to be clear, the rental contracts were real. I’m not promoting loan fraud.
There is so much misunderstanding here that your seller should be talking to a different mortgage broker – one that knows how to calculate DTI ratios with investment rental property in the picture.
The big clue that this mortgage broker is clueless is his statement that the homeowner is no longer responsible for the payments when his property is tenant occupied under a rental agreement.
Thank you all very much for the replies. It sounds like the seller wont have much of a problem with a lease/option so long as it cash flows and he can prove that with the contract. Thanks again.
A rental agreement does not take the rental property out of the DTI calculation, just allows the rental income to be included in the calculations so that the rental property’s impact upon the DTI is minimized.
As far as the lender is concerned, the rental property is still a negative cash flow (a liability) if 100% of the expenses is greater than 75% of the income. If this is the case, the amount of the shortfall is added to your debt when calculating the DTI. If 75% of the income is greater than 100% of the expenses, then the difference is added to your income for the DTI calculation.
You could submit what’s called a debt to income letter to the owner to give to the lender. The essense of this letter is similar to what the rental letter does. Except this explains that the owner does not pay the mortgage and bills on the this property. I hope this helps.
The property to be rented to a tenant/buyer who is also granted an option to purchase – a lease option deal. The owner DOES pay the mortgage on the property. The tenant buyer is only paying rent to the landlord/seller.
If the tenant quit paying rent, the landlord/seller will still have to make the mortgage payment.
Rent is not income as far as the lender is concerned. Rent only offsets the recurring debts. If the difference between 75% of your rent and 100% of your recurring monthly expenses is a positive number, then the DIFFERENCE is income, otherwise it is a liability (more debt).
This is the way it is done and has always been done in my investing experience. No change in the lending world has changed the way rental property is treated for the DTI calculation.