Debt Will Always Outrun Income in DTI Ratio??

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Debt Will Always Outrun Income in DTI Ratio??

Quinn Compton
Member since 2023 · 1 post · 0 votes

I have just been doing the number crunching on DTI Ratio going forward on these. How is it physically possible for someone to achieve 10 public mortgages? The DTI Ratio severely inflates because the income gained from the property on LTR will NEVER overcome the debt payments. For example, the debt payments on my duplex is $1,900. The total rent gained is $2,850. The DTI contribution to my personal DTI is $1,900/$2,850 = .67. Mortgage lenders will not lend a mortgage to someone with a DTI over 50%...... So how can one possibly get to 10 public mortgages without making $200,000-$300,000/year in side income? So let's say you make $300,000 in a year besides real estate. You take out 10 mortgages at an average of $200,000 each so $2,000,000 of mortgages. The debt payments on that $2mil is $17,622/Month. Add in your total income from those 20 properties. We will say it is $1600/month/property= $192,000. So you add in your $300,000 and $192,000 earned from your properties and you come up with a DTI of 43%.... Is that the ticket? You need to make $200,000-$300,000 on the side just to be able to afford the next 10 public mortgages? I don't know, maybe I am thinking of this wrong. Let me know what you think. My next thing is that if I start taking out DSCR's, will I ever be able to take advantage of the 10 public mortgages I am allowed? I am thinking probably not because income will never catch debt payments. Also how does that affect other lending? Buying cars, etc with a 65-70% DTI?

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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
3y
Quote from @Quinn Compton:

I have just been doing the number crunching on DTI Ratio going forward on these. How is it physically possible for someone to achieve 10 public mortgages? The DTI Ratio severely inflates because the income gained from the property on LTR will NEVER overcome the debt payments. For example, the debt payments on my duplex is $1,900. The total rent gained is $2,850. The DTI contribution to my personal DTI is $1,900/$2,850 = .67. Mortgage lenders will not lend a mortgage to someone with a DTI over 50%...... So how can one possibly get to 10 public mortgages without making $200,000-$300,000/year in side income? So let's say you make $300,000 in a year besides real estate. You take out 10 mortgages at an average of $200,000 each so $2,000,000 of mortgages. The debt payments on that $2mil is $17,622/Month. Add in your total income from those 20 properties. We will say it is $1600/month/property= $192,000. So you add in your $300,000 and $192,000 earned from your properties and you come up with a DTI of 43%.... Is that the ticket? You need to make $200,000-$300,000 on the side just to be able to afford the next 10 public mortgages? I don't know, maybe I am thinking of this wrong. Let me know what you think. My next thing is that if I start taking out DSCR's, will I ever be able to take advantage of the 10 public mortgages I am allowed? I am thinking probably not because income will never catch debt payments. Also how does that affect other lending? Buying cars, etc with a 65-70% DTI?

I see that you've learned enough about how it works to be dangerous. :) You google searched "how does rental income factor into my DTI," and read one answer. There are actually about a half dozen different ways that rental income is calculated, scenario dependent. What you just did (the part I underlined) is owner occupied 2-4 unit rental income math. So if the property isn't owner occupied, that isn't the math that would be applicable.

Rental property math (you DON'T live there) is as follows (I'm assuming that $1900 number is the full PITI).

- If the property is not yet on your tax returns, b/c you just purchased it. $2850 * 75% - $1900 = $237.50 in the green. Add $237.50 to income. Add nothing to debts. DTI improves.

- Once the property starts to appear on tax returns, down the line. Suppose you write off $2500 in repairs and other expenses, and $3420 in property management. $2850 - ($2500+3420)/12 - $1900 = $456.67 in the green. Add to income. Add nothing to debts. DTI improves even more.

There are 4 or 5 other formulas, but I suspect those are the ones most likely to be relevant to you today and in the near future.

Reminder that the sheer number of loan originators exploded in 2020 when refi demand increased by 500%, most got very little training, since they were only hired to do refinances of owner occupied single family homes and condos for W2 wage earners, that's all they needed to be trained on. If there's a list of "top 3 things COVID refi loan officers screw up on a regular basis," one of that top 3 would be "anything involving rental income." So work with someone that's been around a while, it doesn't matter that you know how this math works, THEY need to know how it works, or they will not submit it correctly, causing a loan denial that should have been an approval, and now you've lost an entire house!

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    3y
    Quote from @Quinn Compton:

    I have just been doing the number crunching on DTI Ratio going forward on these. How is it physically possible for someone to achieve 10 public mortgages? The DTI Ratio severely inflates because the income gained from the property on LTR will NEVER overcome the debt payments. For example, the debt payments on my duplex is $1,900. The total rent gained is $2,850. The DTI contribution to my personal DTI is $1,900/$2,850 = .67. Mortgage lenders will not lend a mortgage to someone with a DTI over 50%...... So how can one possibly get to 10 public mortgages without making $200,000-$300,000/year in side income? So let's say you make $300,000 in a year besides real estate. You take out 10 mortgages at an average of $200,000 each so $2,000,000 of mortgages. The debt payments on that $2mil is $17,622/Month. Add in your total income from those 20 properties. We will say it is $1600/month/property= $192,000. So you add in your $300,000 and $192,000 earned from your properties and you come up with a DTI of 43%.... Is that the ticket? You need to make $200,000-$300,000 on the side just to be able to afford the next 10 public mortgages? I don't know, maybe I am thinking of this wrong. Let me know what you think. My next thing is that if I start taking out DSCR's, will I ever be able to take advantage of the 10 public mortgages I am allowed? I am thinking probably not because income will never catch debt payments. Also how does that affect other lending? Buying cars, etc with a 65-70% DTI?

    I see that you've learned enough about how it works to be dangerous. :) You google searched "how does rental income factor into my DTI," and read one answer. There are actually about a half dozen different ways that rental income is calculated, scenario dependent. What you just did (the part I underlined) is owner occupied 2-4 unit rental income math. So if the property isn't owner occupied, that isn't the math that would be applicable.

    Rental property math (you DON'T live there) is as follows (I'm assuming that $1900 number is the full PITI).

    - If the property is not yet on your tax returns, b/c you just purchased it. $2850 * 75% - $1900 = $237.50 in the green. Add $237.50 to income. Add nothing to debts. DTI improves.

    - Once the property starts to appear on tax returns, down the line. Suppose you write off $2500 in repairs and other expenses, and $3420 in property management. $2850 - ($2500+3420)/12 - $1900 = $456.67 in the green. Add to income. Add nothing to debts. DTI improves even more.

    There are 4 or 5 other formulas, but I suspect those are the ones most likely to be relevant to you today and in the near future.

    Reminder that the sheer number of loan originators exploded in 2020 when refi demand increased by 500%, most got very little training, since they were only hired to do refinances of owner occupied single family homes and condos for W2 wage earners, that's all they needed to be trained on. If there's a list of "top 3 things COVID refi loan officers screw up on a regular basis," one of that top 3 would be "anything involving rental income." So work with someone that's been around a while, it doesn't matter that you know how this math works, THEY need to know how it works, or they will not submit it correctly, causing a loan denial that should have been an approval, and now you've lost an entire house!

    7Reply
  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    3y

    Millions of people qualify for conventional loans ten or more on investment properties.

    Location makes a difference in how rental verses PITI+HOA can cash flow. If you buy in San Francisco today you need a huge chunk of down payment to make a million dollar plus property cash flow, not so bad in lower cost states. Also you hurt yourself writing the income of rental down to zero or negative as many choose to file.

    0Reply
  • Jay HurstBusiness Member
    Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
    3y
    Quote from @Quinn Compton:

    I have just been doing the number crunching on DTI Ratio going forward on these. How is it physically possible for someone to achieve 10 public mortgages? The DTI Ratio severely inflates because the income gained from the property on LTR will NEVER overcome the debt payments. For example, the debt payments on my duplex is $1,900. The total rent gained is $2,850. The DTI contribution to my personal DTI is $1,900/$2,850 = .67. Mortgage lenders will not lend a mortgage to someone with a DTI over 50%...... So how can one possibly get to 10 public mortgages without making $200,000-$300,000/year in side income? So let's say you make $300,000 in a year besides real estate. You take out 10 mortgages at an average of $200,000 each so $2,000,000 of mortgages. The debt payments on that $2mil is $17,622/Month. Add in your total income from those 20 properties. We will say it is $1600/month/property= $192,000. So you add in your $300,000 and $192,000 earned from your properties and you come up with a DTI of 43%.... Is that the ticket? You need to make $200,000-$300,000 on the side just to be able to afford the next 10 public mortgages? I don't know, maybe I am thinking of this wrong. Let me know what you think. My next thing is that if I start taking out DSCR's, will I ever be able to take advantage of the 10 public mortgages I am allowed? I am thinking probably not because income will never catch debt payments. Also how does that affect other lending? Buying cars, etc with a 65-70% DTI?

     @Quinn Compton As Chris stated above, this is not how it works. I talk to investors all the time who start out asking about DSCR loans because either they are sure or they have been told by a LO that they could not qualify for conventional loans because they own an investment property or two. Sometimes of course that is true, but most of the time it is not. EVEN if they do not have a lucrative W-2 job. (or, often even without a W-2 job at all) If you are buying cash flowing properties without they do NOT worsen your debt to income.

    Hurst Real Estate, INC4.991 Reviews
    WebsiteView Page
    2Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    3y
    Quote from @Jay Hurst:
    Quote from @Quinn Compton:

    I have just been doing the number crunching on DTI Ratio going forward on these. How is it physically possible for someone to achieve 10 public mortgages? The DTI Ratio severely inflates because the income gained from the property on LTR will NEVER overcome the debt payments. For example, the debt payments on my duplex is $1,900. The total rent gained is $2,850. The DTI contribution to my personal DTI is $1,900/$2,850 = .67. Mortgage lenders will not lend a mortgage to someone with a DTI over 50%...... So how can one possibly get to 10 public mortgages without making $200,000-$300,000/year in side income? So let's say you make $300,000 in a year besides real estate. You take out 10 mortgages at an average of $200,000 each so $2,000,000 of mortgages. The debt payments on that $2mil is $17,622/Month. Add in your total income from those 20 properties. We will say it is $1600/month/property= $192,000. So you add in your $300,000 and $192,000 earned from your properties and you come up with a DTI of 43%.... Is that the ticket? You need to make $200,000-$300,000 on the side just to be able to afford the next 10 public mortgages? I don't know, maybe I am thinking of this wrong. Let me know what you think. My next thing is that if I start taking out DSCR's, will I ever be able to take advantage of the 10 public mortgages I am allowed? I am thinking probably not because income will never catch debt payments. Also how does that affect other lending? Buying cars, etc with a 65-70% DTI?

     @Quinn Compton As Chris stated above, this is not how it works. I talk to investors all the time who start out asking about DSCR loans because either they are sure or they have been told by a LO that they could not qualify for conventional loans because they own an investment property or two. Sometimes of course that is true, but most of the time it is not. EVEN if they do not have a lucrative W-2 job. (or, often even without a W-2 job at all) If you are buying cash flowing properties without they do NOT worsen your debt to income.


    But what IS true is that DSCR loan are a lot less work, and require less knowledge, for the loan officer. The uptick of "just use a DSCR loan!" by loan officers, this last year, on these forums, certainly is interesting. :P

    1Reply
  • Jay HurstBusiness Member
    Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
    3y
    Quote from @Chris Mason:
    Quote from @Jay Hurst:
    Quote from @Quinn Compton:

    I have just been doing the number crunching on DTI Ratio going forward on these. How is it physically possible for someone to achieve 10 public mortgages? The DTI Ratio severely inflates because the income gained from the property on LTR will NEVER overcome the debt payments. For example, the debt payments on my duplex is $1,900. The total rent gained is $2,850. The DTI contribution to my personal DTI is $1,900/$2,850 = .67. Mortgage lenders will not lend a mortgage to someone with a DTI over 50%...... So how can one possibly get to 10 public mortgages without making $200,000-$300,000/year in side income? So let's say you make $300,000 in a year besides real estate. You take out 10 mortgages at an average of $200,000 each so $2,000,000 of mortgages. The debt payments on that $2mil is $17,622/Month. Add in your total income from those 20 properties. We will say it is $1600/month/property= $192,000. So you add in your $300,000 and $192,000 earned from your properties and you come up with a DTI of 43%.... Is that the ticket? You need to make $200,000-$300,000 on the side just to be able to afford the next 10 public mortgages? I don't know, maybe I am thinking of this wrong. Let me know what you think. My next thing is that if I start taking out DSCR's, will I ever be able to take advantage of the 10 public mortgages I am allowed? I am thinking probably not because income will never catch debt payments. Also how does that affect other lending? Buying cars, etc with a 65-70% DTI?

     @Quinn Compton As Chris stated above, this is not how it works. I talk to investors all the time who start out asking about DSCR loans because either they are sure or they have been told by a LO that they could not qualify for conventional loans because they own an investment property or two. Sometimes of course that is true, but most of the time it is not. EVEN if they do not have a lucrative W-2 job. (or, often even without a W-2 job at all) If you are buying cash flowing properties without they do NOT worsen your debt to income.


    But what IS true is that DSCR loan are a lot less work, and require less knowledge, for the loan officer. The uptick of "just use a DSCR loan!" by loan officers, this last year, on these forums, certainly is interesting. :P

     @Chris Mason DCSR does not even require a license in a lot of states!   When you are a hammer, everything looks like a nail. 

    Hurst Real Estate, INC4.991 Reviews
    WebsiteView Page
    1Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
    3y

    The only reason to use DSR loan is to keep your name off the deed.

    Rates are always better on Conforming mortgages compared to DSR (apples to apples).

    [email protected]248-209-6824
    Logical Property Management4.9459 Reviews
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    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Quinn Compton:

    I have just been doing the number crunching on DTI Ratio going forward on these. How is it physically possible for someone to achieve 10 public mortgages? The DTI Ratio severely inflates because the income gained from the property on LTR will NEVER overcome the debt payments. For example, the debt payments on my duplex is $1,900. The total rent gained is $2,850. The DTI contribution to my personal DTI is $1,900/$2,850 = .67. Mortgage lenders will not lend a mortgage to someone with a DTI over 50%...... So how can one possibly get to 10 public mortgages without making $200,000-$300,000/year in side income? So let's say you make $300,000 in a year besides real estate. You take out 10 mortgages at an average of $200,000 each so $2,000,000 of mortgages. The debt payments on that $2mil is $17,622/Month. Add in your total income from those 20 properties. We will say it is $1600/month/property= $192,000. So you add in your $300,000 and $192,000 earned from your properties and you come up with a DTI of 43%.... Is that the ticket? You need to make $200,000-$300,000 on the side just to be able to afford the next 10 public mortgages? I don't know, maybe I am thinking of this wrong. Let me know what you think. My next thing is that if I start taking out DSCR's, will I ever be able to take advantage of the 10 public mortgages I am allowed? I am thinking probably not because income will never catch debt payments. Also how does that affect other lending? Buying cars, etc with a 65-70% DTI?


    there're few method of calculating DTI:
    1) some lenders calculate actual rental income for the past two years for DTI, this is the most common way
    2) some portfolio lenders could do 75% of appraisal value of rental income, to pass DTI.  This is used by most investor.

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