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Old 05-20-2011, 12:43 AM
 
4 posts, read 45,076 times
Reputation: 12

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I like to purchase another primary residence but not sure if my DTI is too high. I'm currently living in a condo that I own for 2-1/2yr but would like to rent it out once I buy another house. I currently also have 2 rental home. Here are the detail of my properties:

condo currently live in purchased 2-1/2 yrs ago, have ~30% equity:
monthly mortgage $1610 + prop tax $200 (impounded) + $260 HOA
The rental rate is ~$1800/month.
Mortgage balance: 158K and property value~230K.

1st rental house purchased ~ 2yrs:
monthly mortgage $1050/mo + prop tax $200
rental income = $1550/mo.
been renting it out for 20months. Included in my 2009 and 2010 tax return.
mortgage bal: 125K and property value ~245K

2nd rental house purchased 13 months ago:
monthly mortgage $1140/mo + prop tax $200
rental income = $ 1700/mo.
been renting it out for 13months. Included the rental income in my 2010 tax return.
mortgage bal: 143K and property value ~240K

I want to purchase a ~$450K home and finance ~$320K.
My monthly w2 income ~$7600.

For the condo, not sure if I can count it’s estimated rental income assuming if I can get a rental agreement before I purchase the new house. Also if yes, would the mortgage be part of the debt ratio or just the net rental loss/income be part of the ratio.

For the 2 rental houses, how do I add that to the debt/income ratio? Do I add both the rental income and mortgage to the ratio or just the net income/loss to the ratio?
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Old 05-20-2011, 02:00 AM
 
Location: Laguna Niguel, CA
768 posts, read 4,212,267 times
Reputation: 457
Howdy neighbor.

When you are vacating your primary residence and buying a new primary residence, and will be renting the vacated primary residence out and want to use it's rental income to qualify, you are required to have a certain amount of equity (25% if qualifying for an FHA loan, 30% for conforming) or be relocating to a new area for employment not within a reasonable commuting distance (FHA/VA/USDA guideline only, conforming only permits it with the equity). Assuming you truly are living where I assume, FHA will use 85% of the rental income on the rental contract you get to offset the condo's housing expense, and conforming will use 75% of it to offset. You are required to have a rental contract valid for 12 months past the closing, as well as a copy of the security deposit and/or 1st months rent cancelled check (after you deposit it the tenant should be able to get a copy from their bank within 2-3 days), and then also will confirm the corresponding deposit on your bank statement.

Using rental income from rentals already on your tax return is used with the figures from Schedule E, as well as the current rental contract (to set the limit for the qualifying rental income).

Let's take rental #2 since you've only reported it on your 2010 returns. You purchased it in April of 2010 it sounds, so you owned it for 8 months in 2010. If you put a renter in there 30 days after closing, then on Schedule E, line 3, would be $11,900 (7 months @ $1,700), and outside of the HOA dues, property taxes, insurance and mortgage interest (which are all going to be taken from your mortgage payment), and depreciation/depletion (which aren't actual expenses), you have $800 in management fees & $1,300 in repairs. The underwriter would consider over those 8 months you had a net rental income of $9,800, or $1,225/mo. That $1,225/mo (since it doesn't exceed the $1,700/mo current rental contract) would be used to offset it's $1,340/mo housing expense ... or that property would be adding a $115/mo payment to your liability column (nothing added to your income column).

For rental #1 an average of the income off of the 2009 & 2010 Schedule E's will be used in that same manner.

Only using 75% of the rental income you listed to offset those home's housing expenses, and assuming you can rent out your condo for $1,200/mo and using 75% of that income to offset your condo's housing payment, $450k sales price, $130k down payment, your total debt ratio would be about 46%... which if you have excellent credit, and a decent reserves left after your down payment, that would be fine to qualify. With conforming financing, a lot of, but not all, lenders have caps at 45%, 49.99%, or 54.99% depending on how conservative they are (and how high of debt ratios their investors will accept).
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Old 05-20-2011, 10:42 AM
 
4 posts, read 45,076 times
Reputation: 12
Thank you neighbor. This is very helpful!!
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Old 05-20-2011, 12:11 PM
 
Location: Laguna Niguel, CA
768 posts, read 4,212,267 times
Reputation: 457
Welcome.
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Old 05-23-2011, 04:56 AM
 
Location: MID ATLANTIC
8,372 posts, read 21,481,357 times
Reputation: 9781
One thing that needs to be continually stressed is portfolio funding still exists, and when found, your mileage will definitely vary with which particular nuances will be different. I say this because I work for a portfolio lender, and we still look at rental income like we did 20 years ago.......we use leases without regard to equity on both residences turned rentals, as well as, subject properties on investment loans.

Another thing we do different is on refinances with a second trust taken out after the purchase. Most lenders (and Fannie Mae and FHA) today consider those refinance loans a cash out transaction. We will not view the transaction as a cash out as long as there haven't been any draws on the 2nd in the past 12 months.

I won't go on with the many more differences portfolio lending offers, but I wanted to make sure anyone doing a search on "rental income" understands that they can find variances, but they must specifically shop for portfolio financing.
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