Questions about DTI

[John Cho]

Need some advice and some basic questions about maxing out conventional financing before resorting to commercial financing/DSCR loans for STR.

Im trying to figure out how much I can afford on my next acquisition based on DTI. Ive got pristine credit (>790) and can put 20% down. Some of the lenders Ive spoken to have just used my W2 wages and discounted what Ive made on K1 income as a LP in syndicated deals and 1099 income reported on schedule C. I also have irregular biweekly paychecks due to variable income I make on bonuses but my W2 is relatively stable year to year. Im also a little confused that some lenders wont consider rental income from a STR at all or some after one or two tax returns and how that fits into DTI calculations.

What do I need to communicate to lenders/brokers that so that I can get gauge of what the max purchase price I can seek on my next acquisition
while minimizing the amount of financial colonoscopy I need to perform with all the document requests/credit pulls? 

[Scott E.]

If you gather the following documents, put them all into a dropbox, and send the dropbox off to a few loan officers, you should get a good idea as to what they can do for you. A good MLO will review your file with an underwriter prior to stringing you along due to your situation is a bit more complex than average. Call a big bank, a local credit union, and a mortgage broker.

-Loan application (this will vary from lender to lender)

-2 years W2

-2 years 1099

-4 recent pay stubs

-2 years personal tax returns

-2 years business tax returns (to include K1, 1065, 1120, etc)

-YTD P&L for your businesses

-Schedule of REO

This will give them enough to know whether or not you will "fit in their box"

[John Cho]

Thanks.  Keep most of these docs you mentioned in a dropbox folder to keep things organized and ready to go.    

The loan applications of some of these lenders/brokers are pretty janky and make me want to stab my eyes out trying to fill them out. I want to just get a quick and dirty on the rate and terms offered before having to commit to filing anything out.   

[Eric Veronica]

If you want an accurate answer they you need to provide the necessary documentation that the lenders are requesting. There really is no minimizing documentation if you want to get an accurate answer. Per your post you have variable w-2 income, an LLC, 10-99 and short term rental income. Each of those income sources require an extra level of calculation to determine consistency and whether any of that income is increasing vs declining.

If you are looking for conventional financing from a lender who does not ask for this documentation up front should be more of a red flag than anything else.   Believe it or not there are lenders out there who say yes to everything up front without actually doing the proper income calculations up front.  Instead they wait until the loan is in process and they let underwriting to all the calculations rather than vetting anything up front.  Its a lot better to iron out as many income questions up front before you have a deal in place rather than trying to solve problems the week of closing.  

[Rick Albert]

If you want a quick analysis, just ask what the DTI ratio is for that lender. For example, if it is a 43% DTI and you make $10,000/month that's $4300/month minus monthly debt (car, credit card, student loans, etc). Then use your calculator to figure out the mortgage, property taxes, and insurance. It gives you a ballpark figure.

[Erik Estrada]

Quote from @John Cho:

Need some advice and some basic questions about maxing out conventional financing before resorting to commercial financing/DSCR loans for STR.

Im trying to figure out how much I can afford on my next acquisition based on DTI. Ive got pristine credit (>790) and can put 20% down. Some of the lenders Ive spoken to have just used my W2 wages and discounted what Ive made on K1 income as a LP in syndicated deals and 1099 income reported on schedule C. I also have irregular biweekly paychecks due to variable income I make on bonuses but my W2 is relatively stable year to year. Im also a little confused that some lenders wont consider rental income from a STR at all or some after one or two tax returns and how that fits into DTI calculations.

What do I need to communicate to lenders/brokers that so that I can get gauge of what the max purchase price I can seek on my next acquisition
while minimizing the amount of financial colonoscopy I need to perform with all the document requests/credit pulls? 

For your STR, most lenders will only consider the market rents of that particular property to qualify conventionally. What rate are you looking to get? Most DSCR loans are floating in the 7-8% Interest rate 30 year fixed and a 5/1 ARM is around 6-7%. Also, they will need to pull your credit if you want accurate pricing, unless you have pulled it recently.

Your best bet to save all the headache of talking to multiple lenders and jeopardizing multiple credit pulls is to consult with a broker that is familiar with structuring out loans for investors. They will do all the shopping for you at better pricing than going retail. Brokers get wholesale pricing. 

[Bonnie Low]

Great advice @Scott E. - love the succinct check list!

[Dave Skow]

@John Cho- lenders will use  your w2 income ....likely a average  for the  past  21 months or  35 months  ....other  variable income can be used  if you have a  2 yr  + pattern of receiving it  and  if this pattern is uptrending ( eg.  bonus income received in 2021 was  larger than  in 2021)  ... the  schedule E  will be  used  by lenders to  calculate the  positive  or negative rental income  that  will be used for rentals  owned  .....if you have   a  full pre approval in process  -  ask  your loan officer these questions and  ask  them  how the  income is being  derived 

[Lyndsay Zwirlein]

Quote from @John Cho:

Need some advice and some basic questions about maxing out conventional financing before resorting to commercial financing/DSCR loans for STR.

Im trying to figure out how much I can afford on my next acquisition based on DTI. Ive got pristine credit (>790) and can put 20% down. Some of the lenders Ive spoken to have just used my W2 wages and discounted what Ive made on K1 income as a LP in syndicated deals and 1099 income reported on schedule C. I also have irregular biweekly paychecks due to variable income I make on bonuses but my W2 is relatively stable year to year. Im also a little confused that some lenders wont consider rental income from a STR at all or some after one or two tax returns and how that fits into DTI calculations.

What do I need to communicate to lenders/brokers that so that I can get gauge of what the max purchase price I can seek on my next acquisition
while minimizing the amount of financial colonoscopy I need to perform with all the document requests/credit pulls? 

STR income -- The Fannie Mae guideline is that you can use income from a property if it is on your scheduled E. So lenders should be counting your STR income if it is filed on your most recent return. It's acceptable if it's just 1 year of history.

Credit -- just an FYI you have 30 days to shop around once your credit pulled. You can have as many lenders as you want pull and there's no impact to your score.

Irregular paychecks -- you need a 2 yr history of income in order for it to be used. If you have variable income (bonus, commission, etc), you will need to show your YTD paystubs (not just W2s) so we can see the breakdown and be able to count it.

To directly answer your last questions, in my opinion you need an LO that has experience with calculating more complicated DTI situations. You have complexity with self employed income, variable W2 income and real estate holdings. You need someone who knows how to do the calculation AND the guidelines underwriters follow.

hope this helps!!