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Old 03-08-2010, 03:46 PM
 
3 posts, read 15,700 times
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Hi guys, question...

We're currently renting out a house in CA and wanting to buy a new one in TX that we plan to live in for 10+ years. I'm trying to figure out how the bank is going to look at the rental property when qualifying me for a new mortgage.

Our only debt is $1445/month on the rental property. Right now, it's only generating $1100/month in rent. I figure there are two ways to calculate my debt to income ratio:

Method 1
(PITI on new home + other debt) / gross monthly income.

PITI on new home = $1400
Other debt: 75% of rental income - rental mortgage = $620.
Gross monthly income = $5600.

So, that gives me (1400 + 620) / 5600. This equals 36% debt to income.

---

Method 2
(PITI on new home + other debt) / gross monthly income.

PITI on new home = $1400
Other debt: rental mortgage = $1445
Gross monthly income = $5600 + $825 (75% of rental income) = $6425

That gives me (1400 + 1445) / 6425. This equals 44%. If this is how
they calculate it, I'm not going to qualify for the mortgage I'm looking for.
If they do it the first way, I should be OK.

Any thoughts?
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Old 03-08-2010, 04:12 PM
 
28,461 posts, read 75,364,913 times
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The lender will almost certainly look at your situation is something that is closer to your "method 2". If you were to sell the first house you would probably qualify for a bigger mortgage, not too many borrowers have a soft spot for folks that cover the short fall on a rental house. Not saying that what you doing is not 'the right thing to do" just that there is no real model of default that they can use to suggest that your are better risk becuase of it...
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Old 03-08-2010, 04:29 PM
 
Location: Plano, Texas
1,675 posts, read 6,622,584 times
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As Chet said, "method 2" is what they will use. Since your debt ratio is under 45%, you should have no problem qualifying as long as you have good credit and some assets. (this is assuming the rental mortgage payment includes taxes and insurance. )
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Old 03-08-2010, 04:59 PM
 
72 posts, read 169,114 times
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Not sure if every lender is following the same rules or not but we just inquired about purchasing a new home while renting our current one and were told that the lender would not count any rental income at all and we have to qualify paying both mortgages.
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Old 03-09-2010, 11:23 AM
 
12 posts, read 64,855 times
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Dallasparker is correct. Unless you have 20% equity in the rental in current market value, you will be considered having to pay for both homes by yourself. The rental income will NOT be considered. If you do have 20% equity in the home then rental income would be considered at 75% of the total.

If you do have the equity, then in both cases you are fine to get a home. Some programs will be able to do you up to 45% DTI.
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Old 03-09-2010, 01:04 PM
 
28,461 posts, read 75,364,913 times
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Agreed. I think both VB and I are assuming that the OP has at least some equity in the home they are renting out. Generally if you have NO equity in the home there is really not much sense in covering any shortfall between the mortgage and rental income -- in most such cases you'd be better off not continuing to pay the mortgage at all...

Big pile of equity even at current depressed real estate price and it is simpler just to sell it and hope what ever profit you have can be invested in some asset that will appreciate faster than real estate will rebound.

The grey area, and the one I suspect the OP is in, is where equity might be even a little below 20% at current prices but loan has no PMI or other surcharges, yet the hope is that eventually prices will rebound to the point where a nice gain be realized. Another situation is where the OP (or some one in similar situation) wants to move back the area and they anticipate that happening in time frame where real prices are signficantly above where they current stand -- wouldn't want to "sell low" and then be forced to "buy high" moving back, but you need a crystal ball to judge what those time frames will be...
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Old 03-09-2010, 08:08 PM
 
Location: Lending in all 50 states
189 posts, read 744,283 times
Reputation: 109
Quote:
Originally Posted by Swil View Post
Dallasparker is correct. Unless you have 20% equity in the rental in current market value, you will be considered having to pay for both homes by yourself. The rental income will NOT be considered. If you do have 20% equity in the home then rental income would be considered at 75% of the total.

If you do have the equity, then in both cases you are fine to get a home. Some programs will be able to do you up to 45% DTI.
There are a couple of scenarios where the rental income can be included without 20% equity.
1) If the borrower can document a history of receiving rental income on tax returns.
2) FHA also has some exceptions to these rules.
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Old 03-09-2010, 10:51 PM
 
Location: Anchorage, AK
73 posts, read 260,638 times
Reputation: 61
Most lenders will let you count the rental income if you claim it on your tax returns. Then they would use your tax returns to figure out how much income or loss to count for you on that property.

If you've never claimed it on your tax returns then you have to have 30% equity (lower for other programs) to be able to use that income to qualify for your new home.
One of the main reasons for this, is lenders don't want people renting out their current primary residence to buy another one and then abandoning their rental because they secured a new primary residence.
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Old 03-10-2010, 07:57 PM
 
12 posts, read 64,855 times
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Some banks will, some don't count it regardless (very important your LO knows "who is whom" when it comes to the banks), Some won't unless the income was there for two yrs or more. God forbid the investment home is in the name of the owner's LLC (oops I digress) Doesn't sound like that's an option since this has been their principle res. and now the OP is renting it. Sounds more short term. That's why I never mentioned it. In cases of Tax returns and rental income; at least ONE FULL YEAR. It needs to be on your 2009 returns that you're filing right now...Otherwise, please refer to the previous posts and the 20-30% equity issue.

I know we all totally moved away from the DTI (Debt to Income ratio), which is the original question, but what has been discussed by everyone, are the real issues, that would adversely affect your DTI.

So finally, To clear some confusion in case there's any, here's the bottom line:
1) Basically if you have the equity; in all cases you're fine. Your DTI can fly either way you calculate it.
2) If you have the taxable income on your tax returns AND (forgot to mention) copies of all canceled rent checks, just to be clean and sure (Ive been dinged by that once); then you are also fine.

If you have neither, you're screwed...
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Old 03-10-2010, 08:26 PM
 
Location: Mid-Atlantic
1,820 posts, read 4,137,126 times
Reputation: 1910
Quote:
Originally Posted by Dallasparker View Post
Not sure if every lender is following the same rules or not but we just inquired about purchasing a new home while renting our current one and were told that the lender would not count any rental income at all and we have to qualify paying both mortgages.
That is exactly what we were told as well.... they are not all "Playing by the same rules". We have very low debt and a 6 figure income, it took us almost a year to finally get an approval for a loan to purchase our new home while still having to rent out our home that we are trying to sell....
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