How does rental property income/expense play in DTI and loan approval?

[OCMan_IHB]

Not exactly an Irvine Realestate question but I had a debate with my coworker about whether rental income/expense are included in DTI calculation. Here is a senario. Which case is correct? I thought it was case 1 that lenders are using. Thanks.



Monthly income : $10,000

Rental prop expenses: $2000

Rental income per mo.: $2667

other debts : $1000



Goal: getting a loan from a lender with a favorable DTI



Case 1:

DTI = ($2000+$1000)/$12667 = 23.6%



Case 2:



Rentat expense is covered by rental income even with 25% vacancy rate.



DTI = $1000/10,000 = 10%

 

[graphrix_IHB]

[quote author="OCMan" date=1231518996]Not exactly an Irvine Realestate question but I had a debate with my coworker about whether rental income/expense are included in DTI calculation. Here is a senario. Which case is correct? I thought it was case 1 that lenders are using. Thanks.



Monthly income : $10,000

Rental prop expenses: $2000

Rental income per mo.: $2667

other debts : $1000



Goal: getting a loan from a lender with a favorable DTI



Case 1:

DTI = ($2000+$1000)/$12667 = 23.6%



Case 2:



Rentat expense is covered by rental income even with 25% vacancy rate.



DTI = $1000/10,000 = 10%</blockquote>


When you say "rental property expenses", does that mean his mortgage payment on the property, or just the expenses i.e. repairs, taxes, hoa, water and trash, etc., or the mortgage and the expenses? Are the expenses and other debts on an annual basis or monthly basis?



If the $2000 in expenses is just the mortgage, then on an annual basis that would be $24k, the income would be $120k, the rental income would be $32k, and the other debt would be $12k. Then the underwriter would look at it like this...



75% of $32k rental income = $24k + $120k income = $144k.



$24k of rental property mortgage debt + $12k of other debt = $36k.



$36k/$144k = 25% debt ratio.



It sounds to me like your co-worker needs to clarify what exactly those "expenses" are, and would he show his tax returns to the underwriter to prove his theory?

 

[stepping_up_IHB]

They take the mortgage, taxes and insurance to determine your monthly costs on the property. You get credit towards your income of 75% of the gross rent.

 

[OCMan_IHB]

Ok. I got it. So if DTI = 25% already, if he tries to buy a new house while still keeping the rental property, he can't buy any since he only has 3% (if 28% DTI applies) left tois ward the new house, right or am I missing something.



I guess my ultimate question is that can my friend get his "move up" house with his rental property only breaks even... Thanks again.

 

[irvine_home_owner_IHB]

And underwriting with rentals is really strict right now. They are very cautious to look out for buy and bail... our buyers had a hard time qual'ing because they were keeping their present home as a rental and they had to change lenders to close escrow.

 

[stepping_up_IHB]

[quote author="OCMan" date=1231568206]Ok. I got it. So if DTI = 25% already, if he tries to buy a new house while still keeping the rental property, he can't buy any since he only has 3% (if 28% DTI applies) left tois ward the new house, right or am I missing something.



I guess my ultimate question is that can my friend get his "move up" house with his rental property only breaks even... Thanks again.</blockquote>


It sounds like you are asking if he can rent out his current primary and move up. This may be tricky because the banks want to see a rental agreement. He may have to find a renter and get a lease signed before closing on a loan.

 

[biscuitninja_IHB]

When I refi'd my rentals, they looked very, very closely at what my "expenses" were. Plus they looked at the payment history what my current DTI was and any equity I had built into the system. They essentially wanted greater than 38% equity, a strong payment history (on renters and owners side) as well as containment of expenses (as well as tracking). I still had to pay a premium to get the loans.



If it were me, i'd go conservative and get the "move up" house without the any benefit from the old house. I'd actually have the old house be a "debt". You can never tell when or if a renter will trash your place or you'll need to put a few $$ into fixing something. Even missing rent for 1-2 months will put your entire year out of wack. Save up more money and go in with a STRONG position. If they can tough it for 6 months and live cheapily they will save a good portion and put themselves into a great position to get the big house.



-bix