Overcoming DTI

[Katherine Madison]

My husband and I are forming our plan for rental property investing. We have the 25% downpayment for the first Single family residence that would allow a mortgage note of $1,050 per month and rent for $1750 and have a cash flow best case $700 per month assuming no vacancy/repair ect. We have great credit and our only debt is our personal mortgage of $1850. The lender told me that getting the first investment property is easy but the second is very hard because he will calculate our new Debt as both mortgages (even though I have a tenant paying one) and he will only add the positive cash flow of $700 per month to our income column pushing us over the 45% DTI range when we want a second rental. How do people acquire multiple single family homes? Our plan follows Brandon Turner's book steps for saving for the next 25% downpayment and so on but apparently having your down payments isn't enough? We make a base salary of about $80k (with overtime $110k) If relevant we do have $150k in 401k, $100k in equity in personal home, and $10k in savings. Am I missing something? Thanks!

[Chris Mason]

Hi @Katherine Madison,

That math is wrong, as you described it. If an investment property is cashflow positive the way we do our math, we can add that positive net number as income, and otherwise exclude the PITI of that property entirely. As you described it, that's the math for owner occupied 2-4 unit properties (note: Fannie Mae does not acknowledge the existence of "owner occupied investment properties" that everyone talks about. It's one or the other. You live there or you don't). Fannie Mae has several different ways of calculating rental income, and getting it wrong is very common even for seasoned LOs.

Take a look at the image below, from an .xls file found here at fanniemae.com.

That individual lender might have an overlay preventing this. Relevant link: How Lender Overlays Prevent Deals. Or that individual lender could be dumb. A lot of real estate professionals are dumb. No link to support that, just take my word for it.

Hi @Will Pritchett,

No two year wait required, hasn't been that way for a while. That is also an overlay that many, but not all, lenders have. Keep calling until you find a minimal/no overlays lender. Check out the above where it says "property was acquired subsequent to the most recent tax filing" -- obviously that wouldn't be there if the rental income couldn't be used for two full tax years, right?