DTI Calculation Confusion
Investor · Fairfax, VA · Member since 2022 · 24 posts · 9 votes
I have income from a W2, 1099s/Schedule C, and rental income on my house hack. Something about this seems to make calculating my DTI wacky; I know lenders aren't just adding up my gross income from all these sources and dividing my debts by that. However, I haven't found anyone who would break down for me how exactly they calculate it, then. My understanding is that it varies from lender to lender as well.
The difference between being able to use a 10% second home loan vs a 20% down DSCR loan would mean a big difference in how quickly I can purchase my next investment. Understandably, lenders don't want to crunch these numbers for me before knowing if I'm ready to apply for a loan… but whether I'm ready to apply depends on whether I can get 10% down or not. Sigh.
So how can I accurately calculate my DTI to determine once and for all what my options are? Any advice or suggestions?
Ya really just have to go through a pre-approval to find out.
Ya really just have to go through a pre-approval to find out.
I have income from a W2, 1099s/Schedule C, and rental income on my house hack. Something about this seems to make calculating my DTI wacky; I know lenders aren't just adding up my gross income from all these sources and dividing my debts by that. However, I haven't found anyone who would break down for me how exactly they calculate it, then. My understanding is that it varies from lender to lender as well.
The difference between being able to use a 10% second home loan vs a 20% down DSCR loan would mean a big difference in how quickly I can purchase my next investment. Understandably, lenders don't want to crunch these numbers for me before knowing if I'm ready to apply for a loan… but whether I'm ready to apply depends on whether I can get 10% down or not. Sigh.
So how can I accurately calculate my DTI to determine once and for all what my options are? Any advice or suggestions?
Before you go much further, you have to decide how you're going to use the property. If you intend to live in the property, AT ALL, you should not consider a DSCR loan. If you intend to live there for a few weeks here and there, it's a 2nd home. There is no wiggle room on the definitions.
Regarding income, if your tax returns are complicated and you take lots of deductions with 1099 and Schedule C (in addition to standard depreciation being added back in) then make the decision to not live in the property and go DSCR. It's much simpler.
I have income from a W2, 1099s/Schedule C, and rental income on my house hack. Something about this seems to make calculating my DTI wacky; I know lenders aren't just adding up my gross income from all these sources and dividing my debts by that. However, I haven't found anyone who would break down for me how exactly they calculate it, then. My understanding is that it varies from lender to lender as well.
The difference between being able to use a 10% second home loan vs a 20% down DSCR loan would mean a big difference in how quickly I can purchase my next investment. Understandably, lenders don't want to crunch these numbers for me before knowing if I'm ready to apply for a loan… but whether I'm ready to apply depends on whether I can get 10% down or not. Sigh.
So how can I accurately calculate my DTI to determine once and for all what my options are? Any advice or suggestions?
For base salary income, your current earnings are used to qualify. For schedule C usually it's a 2 year average via tax returns to qualify (although exceptions can sometimes be made for 1 year average). Rental income is usually calculated from your schedule E on your most recent filed return.
This is way oversimplified - there are exceptions and alternatives to these rules and some banks could have additional overlays. Like Allan said you'll really just need to complete an app with someone to get any concrete info.
Hi OP -
I would be happy to help you with income calculations. PM or send me your email and I'll send you a copy of my spreadsheet I use to calculate income for my clients. Good luck!
I have income from a W2, 1099s/Schedule C, and rental income on my house hack. Something about this seems to make calculating my DTI wacky; I know lenders aren't just adding up my gross income from all these sources and dividing my debts by that. However, I haven't found anyone who would break down for me how exactly they calculate it, then. My understanding is that it varies from lender to lender as well.
The difference between being able to use a 10% second home loan vs a 20% down DSCR loan would mean a big difference in how quickly I can purchase my next investment. Understandably, lenders don't want to crunch these numbers for me before knowing if I'm ready to apply for a loan… but whether I'm ready to apply depends on whether I can get 10% down or not. Sigh.
So how can I accurately calculate my DTI to determine once and for all what my options are? Any advice or suggestions?
I'll usually go over the numbers and math with someone, after I have paperwork in-hand, and where those numbers came from. The guidelines are over 1000 pages long, so no it's not realistic to go over "all" the income calculations with zero paperwork in hand. But, after filtering out tire kickers (via who did, and didn't, provide paperwork), I'm typically happy to go over that subset of the 1000 pages that's applicable to the particular person in question.
Your question is a version of:
"I'm sick. I need a doctor. But I don't want to go to a doctor until I know what I'm sick with, and what the right medicine is. How can I accurately figure out what I'm sick with, and what the right medicine is?" --- you go to a doctor. The good news is that you get to pick the doctor.
Speaking of which, back when Web MD came out, a bunch of doctors were concerned that it would put them out of business. Not the case. In fact, it put so much semi-accurate and accurate-but-misunderstood information out there that it mostly just confused everyone, and before you knew it the "ear nose and throat" doctors had more business than ever before because suddenly everyone with a sunburn thought they had skin cancer, every stubbed toe was a compound fracture, and so on. Is anyone reminded of anything a little closer to home on this very forum? :P