DTI ratio too is high. What should I do?

Question

I have yet to make my leap into to my first investment property but I'm trying to do so now. I'd like to purchase a second property for a new primary residency but keep my current home and rent it out. My issue comes with my DTI ratio being too high to have both properties on my credit report. What would be the best route to go to make it work to where I can have both properties?

I thought about "purchasing" my current property with an LLC. Is this a good route?

I thought about "purchasing" my current property with an LLC.  Is this a good route?

Chris Mason · Answer

If the departing primary residence will cashflow as a rental property, your DTI will be fine once it is correctly calculated, but your current go-to lender might not be fine when she or he learns that you ditched them for an investor-friendly lender that knows how to do basic REI DTI mortgage math. :)

Derek Sperzel · Answer

So a conventional lender typically wants to see your DTI come in at 45% or lower including your potential new mortgage payment.  Anything higher doesn't meet conventional lending standards, and halts all efforts for these type loans.  I am currently facing the same issue, and here are the steps I have taken to remedy it.

1.) You'll need to determine your current DTI with the following formula:

monthly income divided by 12, and multiply that by .45 (you'll really get a lenders attention by knowing this ahead of time, and come off much more professional).  I like to present any potential lender with a packet of my financials.  I include the following: personal financial statement, 1,3,5,20 year business plan, prior two year tax returns, and my companies operating agreement.

So, if you made $50k per year, divide that by twelve and you get $4,167.00, then multiply that by .45, and you get $1,875.00.  That means the maximum fixed debt (all your personal mortgages, loans, etc) you can afford including your new loan payment needs to come in at, or under, $1,875.00 per month.

2.)  Notice I said personal loans above.  Loans originated to your LLC typically won't affect your personal DTI, even if they're a sole member LLC.  Sometimes this isn't true if you try to quitclaim deed a property to your LLC after the loan originated in your personal name.

3.)  I am currently paying off some of my personal debt to improve my DTI, but I am only doing so on loans which have already experienced a significant amount of pay-down.

4.)  I know this isn't quite applicable for you yet, but you can also speak to your CPA (the biggest impact route I've taken) about how to increase your reported taxable income.  I know it sounds counter intuitive, but you can increase your passive income by claiming everything legally possible as capital expenses.  This will improve your DTI by boosting your earnings, while simultaneously increasing the amount of deduction you can claim under the new tax deduction 199a.  BTW, that deduction is added back in to your AGI for lending purposes, and currently eligible for the next 7 tax years.  Speak with a CPA before attempting this, because the IRS specifically mentions multiple passive investment properties are required to qualify for this deduction.

Best of luck, and I hope you find something here helpful!

Account Closed · Answer

@Jason Tobkin shoot for a commercial loan. If the property cash flows well enough to cover the lenders debt service coverage ratio, and you have adequate liquidity, you should be able to qualify. Basically, the commercial lender wants to make sure you're not living off the property's income, it covers its own expenses with adequate margin for error, and you've got more than just your downpayment in the bank, in case you have to come out of pocket to cover some rough times.

Caleb Jordan · Answer

Commercial loan is a good option, you could also see if any HML have a long term financing route, some offer such loans.

Cassi Justiz · Answer

Since you still have a mortgage on your first property, transferring title *could* trigger the due on sale clause if the mortgage holder looks into it. (You probably won't but it's still a possibility and something to be aware of). Also, you are still financially obligated to the loan so I don't think changing the title over will do much for you.

When I used a conventional loan to buy an investment property I had to give them a projected income statement for the rental property I was trying to acquire. If you go with a smaller bank that does their own underwriting maybe they would take that into consideration against the DTI. The smaller commercial lenders I've talked have asked that I have 6 months of mortgage payments per property to act as a "buffer" prior to lending on a second one.

So maybe the combo of having a decent amount of money in reserves and being up front with the banker about the potential for your property as a rental will help.

DTI ratio too is high. What should I do?

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