How does seller financing effect my debt to income ratio?

Question

Hello,

So, I believe these are the three things looked at by a lender.
[1] credit score
[2] debt to income ratio
[3] how much money I make a year

I can control my credit score, but I can't control my job income (to some degree...that's why I'm beginning investing.)

But what about debt to income ratio?. My thought was I could buy more property without it effecting my debt to income ratio if it was seller financed. Is this the wrong way to think about this? Are there some really good resources you could point me to?

**And sorry about the title deb = debt (The editor wouldn't let me edit the title after I submitted the post)

Thanks,
J

Jon Holdman · Answer

Also, as you acquire rentals, they will help your income (hopefully) and reduce your DTI, not increase it.  Here's how it works.

First, completely ignore the rentals.  Add up your debt payments and your income.  That computes your DTI.  Now, for existing rentals when you apply for a loan, the lender will look at your tax return and look at the bottom line from the rentals (Schedule E).  Positive?  It increases the income (denominator) and improves your DTI.  Negative?  It increase the debt payment (numerator) and hurts your DTI.  You'll need two years experience as a landlord to count rental income, which is generally considered to mean rental income has to show up on two tax returns.  Once you cross this threshold, a investor friendly lender will then also consider the rental income from the new property you're buying when you apply for a loan.  They will take 75% of the rent, less the PITI payment.  Negative or positive, that's handled the same as above.  Hopefully, these are all positive numbers, so they're helping your DTI, not hurting it.

J Scott · Answer

From your financial standpoint, getting seller financing is no different than getting a bank loan -- it *will* impact your DTI.  Now, a seller financed loan may not show up on your credit report like a bank loan will, but you still have an obligation to disclose it when attempting to get credit, and creditors will certainly take it into account the same as they would a bank loan.

Tom C. · Answer

Loan underwriters are also pretty good at spotting undisclosed debts by looking at your banking records to understand what large outflows relate to.

J Scott · Answer

The other thing to keep in mind is that your mortgage broker is a lot more likely to care about your DTI than a seller who is providing financing.  While a seller providing financing may require a downpayment and will certainly want to see a copy of your credit report and a basic financial history/balance sheet, I imagine most sellers wouldn't calculate your DTI and make a decision based off of that.

I could be wrong though...I don't do any seller financing (on either side)...

James Mudd · Answer

Account Closed ...I think what she is asking is: most people are limited by their DTI...so to accumulate more rentals, can seller financing make this happen sooner?  We all know that we have an obligation to disclose...and we all know how the banks look at things...blah, blah, blah.  But, being creative also involves some risk....so with that said, will seller financing help Jeri to reach her goals?  If she has the money to pay the loans (regardless of tax returns, 2 years bank statements, and all the other required nonsense that irresponsible borrowers forces the rest of us to abide by)...let's here some real answers to this question...?

Account Closed · Answer

So you are saying with a bad DTI (over 36%?), I could *possibly* still do seller financing since the seller will more than likely only look at my credit report (w/other seller financed houses reported) and won't really care/calculate my DTI?

Account Closed · Answer

Thanks J  Scott

I'm trying to think ahead. I'm approved now for at least $150,000 (my mortgage broker said he could probably go higher) I'm about to buy my first investment house, but I want to keep buying and not held up by my debt to income ratio. I'm not sure whether to buy a cheap house in an okay area or a expensive house in a really nice area. I'm not sure to max out my loan amount or stay conservative in preparation for my next buy. That's when I started thinking about seller financing....which I guess doesn't make a difference.

Do have any advice on this?

J

J Scott · Answer

Again, I'm not a seller financing expert, so if anyone who is says differently, listen to them.  But...

I would imagine that most sellers wouldn't ask you to disclose your DTI and most seller financing won't show up on your credit report...

How does seller financing effect my debt to income ratio?

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