DTI for 30 year mortgages on investment properties.

[Aaron Hoyle]

I've seen a lot of discussion around this, but most of the info was from 5+ years ago and the answers were all over the board so I hope someone can guide me in the right direction (a referral to a lender licensed in Louisiana who knows how to handle this would be amazing).  

Long story short, I want to buy more rental property but I'm going to hit the DTI limit soon if I can't find a lender to calculate the numbers favorably. I've got great credit and can handle the required down payment (and 6 months reserves if necessary), but what I'm running into is lenders calculating DTI for rental properties just like they would calculate the debt for a 2nd home or a vacation home.

I've read quite a few Q&A's here that basically say, "as long as 75% of the rental income will cover the mortgage then it's essentially a 'wash' and should not increase your DTI." First of all, is that true? If so, is that only true for new purchases or is that how you'd calculate DTI for existing rentals as well?

For example, I've got a single-family rental that I've owned for 3 years now, so it's reflected on my schedule E (along with the depreciation and other deductions that come with it). When calculating DTI would we look at the schedule E to figure income and then add the monthly note to my debt or would that property be looked at separately (as long as 75% of rent covers the note it's a wash)?

I've also read where some lenders will use the schedule E income but add deductions like depreciation, taxes, insurance, etc. back into your income since it's directly related to the property.  That's not as favorable as looking at each property individually to see if 75% of rent covers the note, but it definitely helps on the income side of the equation.

How this is calculated will make a huge difference in the amount of property I can buy. If I just need 75% of rent to cover the note, then I can buy property as long as I've got the down payment. If each property is going to increase my DTI, then I'll be very restricted.

Keep in mind that I'm trying to do this with a 30 year Freddie/Fannie loan rather than a commercial loan.  I've talked to some great commercial lenders who seem to know all the tricks, but in order for this to make sense I need the longer term and lower interest rate that comes with a Freddie/Fannie loan.  It seems that most of the Freddie/Fannie lenders have great "primary residence" knowledge but are limited when it comes to investment properties.

[Chris Mason]

Quote from @Aaron Hoyle:

Quote from @Jay Thomas:

Real estate is a great investment opportunity, but it can also be difficult to navigate when it comes to the tax implications. Fortunately, you can count 75% of your rental income as long as you have landlord experience. When filing your SCH. E, some expenses such as depreciation, taxes and insurance can be added as income for the lender to calculate how much rental income you are getting from your property. As long as the SCH.E shows enough income to cover PITI (principal, interest, taxes and insurance) of your investment property, it should not impact Debt-to-Income ratio significantly. This is a standard guideline that makes Real Estate investing easier and more accessible for landlords.

I appreciate the reply. I'm trying to figure out the exact way DTI is calculated on these loans for planning purposes. Unfortunately I can't get a consistent answer from a lender, and I'm hearing "different lenders figure it differently" which doesn't really make sense with it being a conforming Freddie/Fannie backed loan. I understand the commercial and hard money loans, but my first choice would be a conventional 20% down, 30 year term loan.
Using your answer as an example, let's say I'm at the DTI limit but the property I'm looking at will pay the PITI with 75% of the rental income. Does that mean the DTI is essentially unaffected and I should be able to get the loan (as long as credit history, down payment, etc are in line)?
If that's the case, then how do properties I already own factor into the equation (monthly note vs rental income)?  Another way of asking is, should I consider my existing rental property when figuring DTI if 75% of the income covers the PITI? 

Your OP's summarizing of posts from 5 years ago was accurate then, and remains accurate today. I'm guessing a bunch of my posts are in what you read, given how prolifically I used to post on the subject. :) I don't post as much now because there's less bad information (and everyone just says "use a crummy DSCR loan instead!"), I cannot tell you how many loan officers back from like 2014 to 2019 would read my posts and then call me for clarification, lulz. 

What you are encountering now is a competence gap among loan officers.

2020 was the year that out of work baristas and bartenders became mortgage loan officers. Back when I joined, it took a high GPA from a fancy university to get my foot in the door as an assistant to an assistant. In 2020/2021 it was just "have pulse? You're hired!" -- the April 2020 hire was a supervising manager of a dozen people hired in late 2020, by mid-2021. 

These people were trained and hired to do refinances (refi demand went up 500% in 1 month). But there are no refinances to be had.

If you're training 100 out-of-work baristas to do COVID refinances, you don't need to teach them how rental property loans work, how DTI works, how rental income is calculated, or how purchase transactions work in general. None of our pre-licensing education covers it, and not a single mortgage loan originator test question is asked about it, either (the test is a joke). The bare minimum training those people need is "Sir, have you lost your job or seen a decline in income since the pandemic started? Have you missed any payments?" -- and boom, if they qualified for the mortgage at 4%, naturally they'd qualify for a refi (lower payment) at 3%.

Here's a quick litmus test you an do to sort out who is who. The MLO's email signature will have their NMLS license number. They are issued sequentially, and the 2,000,000 series happened to coincide with the pandemic. My number (below) tells you that I'm early/mid 2010s vintage, for example. The higher 6 digit ones (under 1m but >500k) are the old salt dogs, low enough (<500k) and that's who was doing mortgages via fax machine and telegraph, the tribal elders who travelled by horse and buggy with a top hat. For what you are after, start by only working with folks under 2m, and from there whittle down further using online reviews that specifically mention investment property loans (if you think I am being hyperbolic or dramatic with my barista comments, please put a few of those >2m license numbers in here and see for yourself: https://nmlsconsumeraccess.org... ).

If the person vastly under 2m is saying one thing (and/or if the old posts you are reading from 2015 say one thing), and the former barista over 2m is saying something else, the <2m person is probably correct.