Getting around debt to income in an expensive market

Orange County, California
Private Lending & Conventional Mortgage Advice
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Getting around debt to income in an expensive market

Myles Taccini
Member since 2019 · 15 posts · 7 votes

Hi fellow BPers!

As the title states I have an issue with debt to income I'd like some perspective on, if possible. My situation:

- I live in Orange County, California where 3br condos go for minimum 500K

- I own 1 condo (3 bedroom), looking to purchase a second (3 bedroom)

- The current debt obligation of the condo I own is $2300/mo (PITI + HOA)

- I live in 1 room, and rent the other two rooms for $1650/mo total

- I plan to move out of the last bedroom and rent out the last room in the condo for a total rent collected of $2400/mo, which seems entirely feasible, if not a bit under market average per rentometer.com

- Monthly gross income from day job ~$7000

- No other debt obligations (car payments, student loans etc.)

I'm wondering if I'll be qualified for a mortgage on a second condo, of let's say $500k. At face value, my DTI ratio is too high, as the lender will likely do one of two things:

A) Use previous tax returns showing I'm collecting $1650/mo in rent, and subtract that from my monthly obligation ($2300) leaving me with a net loss on the first condo of $750 ($2300-1650)

B) Take 75% of expected rental value (let's say 75% x 2400 = 1800), and count the difference of 1800 and 2300 as a net debt against me for the first condo.

As such, when combining the "debt" of my first condo (although I don't personally see it this way) with the debt of the second condo, my DTI will likely be above what most banks and credit unions are willing to lend on.

However I believe I would still be a quality borrower of money, as my current condo will be rented for slightly more than my monthly obligation, plus I would be renting out 2 rooms in the new condo, leaving me with an estimated monthly payment of 800-1000/mo (accounting for PITI + HOA - Rent collected) for both condos combined, still well within reasonable affordability for my W2 income.

If anyone can speak from experience, are the way lenders see these calculations variable from lender to lender, and should I just plan on reaching out to a dozen or so lenders/credit unions? Would a hard money lender be more willing to hear me out on something like this? Or does anyone have any known workarounds or input/insight about qualifying for a second loan?

Thank you so much for any advice you're able to give this newbie!

-Myles

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Nick BelskyBusiness Member
Residential and Commercial Broker · Member since 2021 · 1k+ posts · 704 votes
4y

@Myles Taccini

Ugh... skip all the headaches and go with a private lender.  Better or equivalent rates, way less docs, no credit reporting, and less stressful. 

Get with a mortgage broker. The Credit Unions and Banks are going to throw all kinds of crap terms at you. Get a straight up 30 year fixed rate with no balloons and fully amortized all day long with DSCR loans.

Cheers!

[email protected]
Belsky Mortgage, LLC526 Reviews
WebsiteView Page
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  • Peter MckernanBusiness Member
    Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
    4y

    @Myles Taccini as long as you have lease agreements that are current and cover the renters in the bedrooms of the property you should be good to go, they will confirm it last 60 days of rent, but you have 75% of that showing. All you need is that last lease then you will be covered 100%. You would need just that last lease then you are covered and your DTI will not be hit by the rental cost since you have it covered.

    The McKernan Group4.954 Reviews
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    2Reply
  • Myles Taccini
    OP
    Member since 2019 · 15 posts · 7 votes
    4y

    @Peter Mckernan, thanks for the advice! It's much appreciated. If I understand correctly, with the lease showing for the final bedroom, a lender should be able to count the rent of the full unit, rather than just 2 bedrooms? Would you mind clarifying what you mean "they will confirm it last 60 days of rent, but you have 75% of that showing?" 

    I've talked with a couple of credit unions who've indicated that they would either go off of 1) rental income listed on tax returns or 2) 75% of expected rental value. In your experience or from what you've seen have you been able to count 100% as long as you've had signed leases in place?

    Thanks much!

    0Reply
  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    4y

    @Myles Taccini...get  in touch with a lender and  get   formally  pre approved  to know for sure ......depending on how long  you  have   owned and  rented the present home  will determine  what the lender will use to calculate the  rental income that  can be  used ....the lender  may use  a  combination of  a 2 yr  average of the rental income off your  scehdule E  plus  75% of the new  lease agreement.....

    if the rental income from the present unit continues to provide issues - you might buy the new place and classify this as a rental so that the lender can use 75% of the fair market rent from appraisal ..... which might help with your DTI ... loan terms will be worse but this might be a solution

    2Reply
  • Mike Davis
    Lender · Annapolis, MD · Member since 2022 · 154 posts · 70 votes
    4y

    @Myles Taccini what @Dave Skow suggested would be the best way to go first. If the DTI is still a concern, then a HML may be able to offer some options.

    2Reply
  • Myles Taccini
    OP
    Member since 2019 · 15 posts · 7 votes
    4y
    Quote from @Dave Skow:

    the lender  may use  a  combination of  a 2 yr  average of the rental income off your  scehdule E  plus  75% of the new  lease agreement.....

    That's very interesting, I hadn't heard of that before. If I understand, it might be something like 2 year average of income taxes from the first 2 bedrooms, plus 75% of the lease agreement from the final bedroom? 

    That's a good point about classifying the second property as a rental rather than primary. The 20% down payment is tough to stomach though! haha. Thank you for the insight and advice. 

    @Mike Davis Thanks for the suggestion. If I'm having some trouble qualifying I may dip my toes into HML, I haven't done so before though. I'll need to research that a bit more thoroughly.

    0Reply
  • Alex Hunt
    Lender · Member since 2022 · 441 posts · 134 votes
    4y

    Simple solution here, these are investment properties do not use a bank for them. We do not consider DTI, tax returns, don't need employment verification either, the commercial mortgage does not show up on your credit so it will not affect that or DTI

    I sent you a message to discuss further

    1Reply
  • Maksu Ize
    Investor · Vancouver · Member since 2021 · 165 posts · 137 votes
    4y

    Not what your asking, but im in the same scenario, Vancouver, BC, Canada.

    Im no longer looking at properties in my hood, it simply does not make sense. No matter what i buy, especially using a 20% heloc down, its all cashflow negative. The appreciation bypasses this, but every year your in the negative cashflow.

    Id suggest looking out of state, or xxx miles away where you can buy a unit and be cashflow positive.

    0Reply
  • Peter MckernanBusiness Member
    Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
    4y
    Quote from @Myles Taccini:

    @Peter Mckernan, thanks for the advice! It's much appreciated. If I understand correctly, with the lease showing for the final bedroom, a lender should be able to count the rent of the full unit, rather than just 2 bedrooms? Would you mind clarifying what you mean "they will confirm it last 60 days of rent, but you have 75% of that showing?" 

    I've talked with a couple of credit unions who've indicated that they would either go off of 1) rental income listed on tax returns or 2) 75% of expected rental value. In your experience or from what you've seen have you been able to count 100% as long as you've had signed leases in place?

    Thanks much!


     I would talk to a few different brokers that as long as there a lease in place (just rented it out and maybe one to two months of income they are good). That is someone I would shop around by seeing their flexibility with the whole rental lease tactic. There are brokers that have just had my clients have a lease in place and they approved them with the lease being in place for one month.

    The McKernan Group4.954 Reviews
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    1Reply
  • Myles Taccini
    OP
    Member since 2019 · 15 posts · 7 votes
    4y
    Quote from @Peter Mckernan:
    Quote from @Myles Taccini:

    @Peter Mckernan, thanks for the advice! It's much appreciated. If I understand correctly, with the lease showing for the final bedroom, a lender should be able to count the rent of the full unit, rather than just 2 bedrooms? Would you mind clarifying what you mean "they will confirm it last 60 days of rent, but you have 75% of that showing?" 

    I've talked with a couple of credit unions who've indicated that they would either go off of 1) rental income listed on tax returns or 2) 75% of expected rental value. In your experience or from what you've seen have you been able to count 100% as long as you've had signed leases in place?

    Thanks much!


     I would talk to a few different brokers that as long as there a lease in place (just rented it out and maybe one to two months of income they are good). That is someone I would shop around by seeing their flexibility with the whole rental lease tactic. There are brokers that have just had my clients have a lease in place and they approved them with the lease being in place for one month.

    Sounds good @Peter Mckernan. I think I need to get in touch with those brokers! Haha. I've been calling up some credit unions the last couple days and have gotten a whole range of different criteria, none so far being as simple as having a lease and a couple months' rent. Thanks again. 

    1Reply
  • Myles Taccini
    OP
    Member since 2019 · 15 posts · 7 votes
    4y
    Quote from @Maksu Ize:

    Not what your asking, but im in the same scenario, Vancouver, BC, Canada.

    Im no longer looking at properties in my hood, it simply does not make sense. No matter what i buy, especially using a 20% heloc down, its all cashflow negative. The appreciation bypasses this, but every year your in the negative cashflow.

    Id suggest looking out of state, or xxx miles away where you can buy a unit and be cashflow positive.

    I hear you, it's a bit tough in hot markets, but I'd love to stack up 2 or 3 properties here where I know rent can roughly match the monthly expenses, even if there's no cashflow. Good luck investing OOS!

    0Reply
  • Nick BelskyBusiness Member
    Residential and Commercial Broker · Member since 2021 · 1k+ posts · 704 votes
    4y

    @Myles Taccini

    Ugh... skip all the headaches and go with a private lender.  Better or equivalent rates, way less docs, no credit reporting, and less stressful. 

    Get with a mortgage broker. The Credit Unions and Banks are going to throw all kinds of crap terms at you. Get a straight up 30 year fixed rate with no balloons and fully amortized all day long with DSCR loans.

    Cheers!

    [email protected]
    Belsky Mortgage, LLC526 Reviews
    WebsiteView Page
    3Reply
  • Myles Taccini
    OP
    Member since 2019 · 15 posts · 7 votes
    4y

    Thanks @Nick Belsky for the great suggestion. I may need to end up going with some sort of private lending. I'm a bit new to it however, it sounds a bit like hard money. Is there a reason a private lender would be willing to invest and receive similar interest rates as a bank or credit union? What would be in it for them?

    I've looked into DSCR however I believe the minimum down payment is 20%. For the type of properties I'm looking at here in southern California that would require minimum 100k which is a bit more than what I'm looking to put down.

    Great suggestions and I appreciate the advice. 
     

    1Reply
  • Brad Sneckner
    Lender · Riverside, CA · Member since 2014 · 75 posts · 60 votes
    4y

    Hey @Myles Taccini

    There are some variations in how lenders calculate things, but more so out of misunderstanding guidelines typically, not as an arbitrary decision. As a local lender, I've got a pretty good handle on the rules for this scenario since I've helped many clients do this exact thing. Here's what you'll need to know:

    First, the rents on your current place WILL be discounted at a 75% rate. So you're looking at $1800 in qualifying rental income to offset the $2300 monthly obligation. The good news is that this will actually hit you as a reduction of income rather than a liability (helps with the ratio).

    Second, you'll want to make sure they will allow you to use multiple leases for that rental income calculation on an SFR. Some lenders do not like renting each bedroom out separately and will want to see a single 12-month lease with all the tenants listed on it (maybe you do this temporarily and then revert back to 3 separate leases after closing...)

    Lastly, you will NOT be able to use rental income from the new property's additional bedrooms in qualifying. At least not on a conforming mortgage. You'll be able to collect that money obviously, but it won't count on the mortgage app as income to help qualify. That said, with good credit, depending on how much you plan to put down, it sounds like a $500k approval should be doable based on some rough calcs in my head.

    0Reply
  • Myles Taccini
    OP
    Member since 2019 · 15 posts · 7 votes
    4y

    @Brad Sneckner First of all thank you for your lending your subject matter expertise! It's much appreciated. 

    That's interesting, I hadn't heard about the delta between rental income and monthly expenses being a hit against income rather than liability. That will definitely help with achieving a better DTI.

    Noted about using 1 lease vs. multiple. Any issues you see if a long-term lease has been completed and moved to month-to-month?

    Thank you!

    0Reply
  • Brad Sneckner
    Lender · Riverside, CA · Member since 2014 · 75 posts · 60 votes
    4y

    @Myles Taccini

    Yes, you'll need to have a 12-month lease, not month-to-month.

    0Reply
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