House Hack- How to add rental income to owner occupied?

Question

My wife and I are looking at a triplex in Florida, we currently live in Illinois and are trying to change permanent residency. We are trying to get a Pre-approval with just her income, she works remotely and I am an electrician. I am struggling with applying rental income to offset debt-to-income ratio. Please correct me as needed.

Asking Price $575,000

Down-Payment $150,000

Debt Service @ 4.25% $425,000

Monthly Debt Service $2,091

Insurance $271 ($3,242 Annual)

Flood $156 ($1868 Annual)

Taxes $503 ($6030 Annual)

Monthly Total $3,020

Current Rent: Unit 1 $1025, Unit 2 $1095, Unit 3 $895

Total Monthly Rent $3015 (Currently all month to month leases but all want to stay.)

Market estimate on all 3 units is $1100 monthly.

My wife and I would be taking over Unit 3, makes no sense but we thought it was the nicest, so win!

Soooo the math . . .

Total Monthly Debt $3020 - $2262 (75% monthly income/$3015) = $758 is what would go against DTI Ratio?

Total Monthly Debt $3020 - $2475 (75% Market Rent/$3300) = $545 against DTI Ratio?

or does the third unit not count because we live there?

Total Monthly Debt $3020 - $1590 (75% monthly income on 2 units/$2120) = $1430 against DTI Ratio?

Total Monthly Debt $3020 - $1650 (75% Market Rent/$2200) = $1370 against DTI Ratio?

My wife makes $3700 Gross Monthly, 800 credit scores, NO debt, no car payments, credit cards, student loans, Nothing.

Even at $1430 a month that is 38.6% DTI Ratio, at $1370 37% DTI Ratio.

Was working with a loan officer and she said that we were around $1900 a month off with my wife's income.

What am I missing? Is my math wrong? I can still show we have more for capital reserves, so while I am feeling shot down. I Refuse to take no for an answer.

Zack Karp · Answer

@Jason Demers based on your numbers, your DTI is 57% and that's too high for a Conventional loan, max is 50%.  Here's how the math works, it's much simpler than what you laid out:

Step 1: Take 75% of the gross rent(s) of the units you are not occupying, and add that to employment income.

Step 2: Divide total liabilities by total income

So the total liabilities is only the new PITI of $3020.  The total income is $3700 + $1590 (75% of $1025 and $1095).  The 3rd unit that you are occupying does not count.

$3020 / $5290 = 57%

You wife's income alone does not qualify.  And this property would not pass for FHA because it does not pass the SST (Self Sufficiency Test).  The SST is required on FHA 3-4 unit properties, 75% of all rents including the owner's unit must be greater than the PITI.

Wish I could give you better news.  Assets/reserves doesn't matter, you could have a million in the bank but you still need to have a 50% or lower DTI.  Sounds like you would need to secure employment in FL first so you can qualify together, or on your own if you make enough.

Best of luck!

Jaysen Medhurst · Answer

A few thoughts, @Jason Demers:

• Your interest rate looks really high. With owner-occupied, I expect you'd be closer to 3%.
• Why are you putting $150k down? Might be a better idea to keep the extra $35k on hand.
• With 20% down and 3.125% rate, I'm seeing a debt service of $1940/month.
• You're not considering many expenses: Vacancy (5-8%), Repairs, CapEx, Water/Sewer, for example.
• I usually recommend including Management (10%) when underwriting any rental property, even when self-managing.

At the end of the day, this property probably won't make a good investment after you move out. The price-to-rent ratio is way out of whack. That said, it may still be a good house hack for you to lower your living expenses, build equity, and get land lording experience. A couple of questions:

• Have you been pre-approved or no? You post says you're "trying" to? What's the hold up?
• Will the lender consider the rents from the other units when considering your loan? Many will include 75% of rents.

Jason Demers · Answer

@Zack Karp

That is the clarity on the math that I needed!!

Thank you! That makes so much more sense.

Zack Karp · Answer

@Jason Demers you're welcome!

Jason Demers · Answer

Thanks for the reply @Jaysen Medhurst

I put the interest rate higher as worst case scenario to see if the numbers still work.

Agreed about putting $150k down as a first deal, but I am not opposed to having more equity in the deal. If the numbers work, I would like to just put the 20% down.

I completely understand  about the CapEx/Repairs/ Vacancy as I was just including the numbers based upon getting approved.

This house is on a canal 300ft from the Gulf. So for us, this deal makes a lot of sense, for all the reasons you stated. It will offset the cost of living greatly compared to what it would cost to buy a single family in the same area.

No, we have not been approved yet. One bank said they would not apply rents because of the month to month lease currently set up. Second bank said they would apply the rents on 2 units but the DTI ratio was so far off. I do not know if my math is wrong, but I don't see how this can be the case as we have no debt.

Thanks for any insight!

House Hack- How to add rental income to owner occupied?

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