Debt to Income Ratio with Rentals (insurance, loans, credit card, student loan)

[sixburgh90]

Hi All!

I am a little unclear about how rentals affect debt to income ratio and was hoping someone might be able to better explain, as my understanding is one of the below. My concern is boxing myself out with rentals and not being able to eventually purchase a larger primary residence in the future, if the second applies. Example if my monthly debt (home, auto, cc, etc) is $1000 and my income monthly is $5000. My debt to income ratio would be (1k/5k) 20%. If I have two rentals properties

1. Total monthly rent is 2k and total monthly debt is 1k. The lender typically takes 75% of the rent from my understanding, which the count would be 1.5k. Debt to income ratio would be 1k/1.5k = 67%

Does the lender add the difference 1k - 1.5k = $500 onto my overall total of debt to income so it would be

1k/5.5k instead of 1k/5k which is now 18% instead of the original 20%

Or does the lender count the 1k and 1.5k into both of my totals so the debt to income would be 2k/6.5k = 31% debt to income ratio.

Even with positive cash flow properties the debt to income seems to greatly limit your lender options for a primary home if the second option applies, which I am hoping I am not following correctly :-)

Thanks

[MrRational]

Originally Posted by sixburgh90

I am a little unclear about how rentals affect debt to income ratio...
Or does the lender count...

The lender will count whatever THEY want to.

Most policies though will reflect the math they're used to from the old "4 property" rules.
All policies though will use YOUR specific experiences (P&L, Sch E, etc).

FNMA info links

[LifeIsGood01]

Originally Posted by sixburgh90

Hi All!

I am a little unclear about how rentals affect debt to income ratio and was hoping someone might be able to better explain, as my understanding is one of the below. My concern is boxing myself out with rentals and not being able to eventually purchase a larger primary residence in the future, if the second applies. Example if my monthly debt (home, auto, cc, etc) is $1000 and my income monthly is $5000. My debt to income ratio would be (1k/5k) 20%. If I have two rentals properties

1. Total monthly rent is 2k and total monthly debt is 1k. The lender typically takes 75% of the rent from my understanding, which the count would be 1.5k. Debt to income ratio would be 1k/1.5k = 67%

Does the lender add the difference 1k - 1.5k = $500 onto my overall total of debt to income so it would be

1k/5.5k instead of 1k/5k which is now 18% instead of the original 20%

Or does the lender count the 1k and 1.5k into both of my totals so the debt to income would be 2k/6.5k = 31% debt to income ratio.

Even with positive cash flow properties the debt to income seems to greatly limit your lender options for a primary home if the second option applies, which I am hoping I am not following correctly :-)

Thanks

I don't think I understand your question, but....You have 2 investment properties that rent out for 2k, and your debt for those properties is 1k a month?

But if so you would have a monthly income of 6500 and debt to 2000 which is 31%.

Then the lender would have to add what your mortgage and insurance and tax payment is per month and divide that by 6500 to get your dti ratio for a mortgage.

The only thing your current home payment would not be factored into your first $1000 debt. Only auto payment and minimum cc payments and outstanding revolving debts would unless that home has a mortgage. IF you pay rent it's not factored into your dti ratio because after you buy your home you don't have the rent payment.

[sixburgh90]

Originally Posted by LifeIsGood01

I don't think I understand your question, but....You have 2 investment properties that rent out for 2k, and your debt for those properties is 1k a month?

But if so you would have a monthly income of 6500 and debt to 2000 which is 31%.

Then the lender would have to add what your mortgage and insurance and tax payment is per month and divide that by 6500 to get your dti ratio for a mortgage.

The only thing your current home payment would not be factored into your first $1000 debt. Only auto payment and minimum cc payments and outstanding revolving debts would unless that home has a mortgage. IF you pay rent it's not factored into your dti ratio because after you buy your home you don't have the rent payment.

Thanks LifeisGood! I appreciate you going through. Yes - then sadly it seems the second option applies with the higher ratio, which I was hoping it would be the other. So I guess i will need to limit the purchasing of a third because I do not want to hurt myself in the future when I want to purchase a larger primary residence. Even with cash flow positive properties, any rental seems to raise the overall. I was using the below numbers on the two I have, which the numbers are an example to easily follow

1. Investment 1 - Monthly Taxes, Insurance, mortgage = $500 and monthly rental income = 1k
2. Investment 2 - Monthly Taxes, Insurance, mortgage = $500 and monthly rental income = 1k

Total debt to income ratio = 1/1.5k = 67%

example numbers - Primary residence (taxes, insurance, mortgage), auto, CC = 1k monthly debt

w2 = 5k monthly

1k/5k = 20% debt to income ratio

adding in those two rentals greatly increases my overall debt from 20% to 31% to income ratio even though they both are positive, which is frustrating As now I would be very limited on upgrading to a larger house down the line

[thelopez2]

Originally Posted by sixburgh90

1. Total monthly rent is 2k and total monthly debt is 1k. The lender typically takes 75% of the rent from my understanding, which the count would be 1.5k. Debt to income ratio would be 1k/1.5k = 67%

No

Does the lender add the difference 1k - 1.5k = $500 onto my overall total of debt to income so it would be

1k/5.5k instead of 1k/5k which is now 18% instead of the original 20%

Yes

Or does the lender count the 1k and 1.5k into both of my totals so the debt to income would be 2k/6.5k = 31% debt to income ratio.

No

Even with positive cash flow properties the debt to income seems to greatly limit your lender options for a primary home if the second option applies, which I am hoping I am not following correctly :-)

Thanks

Answers in bold

If you are positive cash flow both in real life and it matches your tax returns, the rentals improve your DTI. Monthly debt is calculated with all expenses you put down on your Schedule E tax returns not just principal, interest, tax, and insurance.

[thelopez2]

Originally Posted by LifeIsGood01

I don't think I understand your question, but....You have 2 investment properties that rent out for 2k, and your debt for those properties is 1k a month?

But if so you would have a monthly income of 6500 and debt to 2000 which is 31%.

Then the lender would have to add what your mortgage and insurance and tax payment is per month and divide that by 6500 to get your dti ratio for a mortgage.

Incorrect

[sixburgh90]

Originally Posted by thelopez2

Answers in bold

If you are positive cash flow both in real life and it matches your tax returns, the rentals improve your DTI. Monthly debt is calculated with all expenses you put down on your Schedule E tax returns not just principal, interest, tax, and insurance.

The thelopez2, as that's what I was hoping :-)! I have never heard of the above situation before, but I have been hearing conflicting info on the two approaches. This makes more sense, as I didn't know how one can obtain over a few properties without running into the dti issue

Appreciate it!

[LifeIsGood01]

Originally Posted by thelopez2

Answers in bold

If you are positive cash flow both in real life and it matches your tax returns, the rentals improve your DTI. Monthly debt is calculated with all expenses you put down on your Schedule E tax returns not just principal, interest, tax, and insurance.

Incorrect. Revolving credit card debt and other debt such as student loans and alimony are included in the DTI ratio and other debts that may not be on schedule E.

[thelopez2]

Originally Posted by LifeIsGood01

Incorrect. Revolving credit card debt and other debt such as student loans and alimony are included in the DTI ratio and other debts that may not be on schedule E.

The context of this thread calculation is rental income.

[LifeIsGood01]

Originally Posted by thelopez2

The context of this thread calculation is rental income.

In the context of using it to buy a primary residence where all debt will be considered into his ratio.