Partnership Question - How much of the payment affects your DTI?

Question

Say I buy an investment property tomorrow with a partner and we split the down payment and equity 75/25 (75% him, 25% me), and the total monthly payment is $1,000.

If I go to buy a new house hack property next year and a lender looks at my DTI, how much of that $1,000 will be added to the 'D' portion of my ratio? The full $1,000? Or Would it be $250 since I own 25% of the property?

Thanks in advance for any help on this! Partnerships are great but the logistics can be confusing at first

Andrew Postell · Answer

@Charles Schmidt I need to provide some clarification here if you don't mind.

Your initial loan TYPE is critical to this equation.  Meaning, a traditional Fannie/Freddie loan will hold the ENTIRE payment against your DTI.  The mortgage will be on your credit.  Even if you have a co-signor (your partner maybe?) the entire payment is held against both of you.  100% of that payment is shown on anyone that signed on the loan.  So if you are splitting profits on your partnership, but have a debt in your personal name, that will show that you are taking a loss.  This is NOT the right way to structure debt with a partnership.

When you are getting debt (mortgage) for your partnership you need to have it be a commercial/portfolio style loan.  A loan that is made TO the partnership.  One that is not held against you personally.  The property is held in the partnership name, the debt is in the partnership name, the expenses, etc.  This way even if you are splitting the profits, it doesn't matter.  Nothing is held against you personally.  Commercial style loans do have a slightly higher rate/costs but it's still the right method to use here.  You don't want to jeopardize any other loans that you may need later due to this one.

The next time you get a mortgage will also be important to how this is viewed.  So let's say you went with the Fannie/Freddie route anyway - maybe you make lots of money and it doesn't matter.  If you were to get another property with a commercial loan - that commercial loan doesn't care (at least, it shouldn't care) about your personal debts.  The commercial style lenders we want to work with should base their decision on the property itself.  There's plenty of lenders that don't even care about your income - just the income of the property.  So even if you didn't do it correct on the first one, a commercial loan will still work out on the next one.

However, if you were to go get another Fannie/Freddie style loan....on your own primary home for example....then it will care about that first loan.  Go that commercial route and that way there's no risk to you.

I hope all of that makes sense but feel free to post about anything else if you need.  Thanks!

Kevin Luttrell · Answer

An underwriter will be able to see that there are multiple parties on the mortgage, and that your tax return only reflects a part of the total income and expenses. If you provide an operating agreement or some evidence that you're only responsible for 25% of the payment (and I assume your tax return would reflect only 25% of the income and expenses) then they will just use $250 for a qualifying payment.

This is underwriter discretion though - a conservative underwriter may want to hit you for the full $1,000. You'll want to mention this up-front with your lender next year when getting pre-approved.

Nick Belsky · Answer

@Charles Schmidt

@Andrew Postell has the details covered on this one!  He's absolutely correct.  As far as DTI goes for other loans, check with your LO.  If they don't know if the loan will be reported, then you need to find out for sure.  Some lenders will report to the bureaus, some do not.  The personal guarantee does not mean it will be reported, it means that it COULD be reported.  To clarify, if you default or get behind on payments, they most likely will begin reporting if they hadn't already.

I've found that most Wholesale lenders will report to the bureaus where most every private money lender will NOT report to the bureaus.  Not absolute but seems to be pretty close to rule of thumb.  The point is ask.  If your LO or mortgage broker doesn't know, find another one who does.

Cheers!

Charles Schmidt · Answer

I really appreciate the detailed answer, that helped a lot! We are actually prequalified for a DSCR loan and plan on forming an LLC that will own the property. Since we will be personally guaranteeing the LLC though, I was told that the debt will still be reported on my personal DTI. This is turning out to be a more fuzzy subject than I thought, it's tough to get a definite answer from most people I've talked to up to this point.

Any other insight on that piece specifically would be great, but I'm also going to reach out to my loan officer and see what his thoughts are. Thanks again for the help!

Partnership Question - How much of the payment affects your DTI?

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