How do DTI levels impact purchasing power/price point?

Question

Hi folks, I have a DTI of around 30% and I'm wondering if the higher your DTI the lower of a mortgage you'll be able to qualify for?

For instance if I were to be right at the upper DTI limit for a given lender, would they limit what I could qualify for versus if I had a DTI that was very low?

For context, I own two duplexes and I'm looking to purchase a primary that I can house hack. I'll be speaking to lenders about this to get a concrete answer but  was generally curious about the relationship between DTI and what I'd qualify for.

Thanks!

Carlos Valencia · Answer

Hello Daniel,

Yes DTI does affect your borrowing power. To be conservative 45% is usually the benchmark used for DTI. Some programs allow you to got a bit higher than 45% it just depends on your scenario. To keep it simple lets say your monthly income is 10k. This means that 45% of that can be used to qualify your for your next loan. This means you can use $4500 as your mortgage payment including Tax and Insurance. If your currently using 30% of your DTI in this scenario then this means you only have $3000-$4500 = $1500 remaining in how much you can pay for your next mortgage including Tax and insurance. In this scenario $1,500 monthly mortgage might not get you much all depending in the are you live or looking to invest. In your scenario you will be hit for the full PITI for your future primary purchase. If your primary will be a single family you wont be able to offset your PITI from roommate rents until you move out. If its a duplex then you can use the rents from the other unit to help offset your DTI and allow you to qualify for more. Hope this helps.

@Albert Bui @Matthew Kwan

Albert Bui · Answer

HI Daniel,

You'll want to strategize in different scenarios to see how you can offset your current 30% DTI liability/payment (aka rent out your current house or room leases to use 75% of these rents upon move out to purchase the next house hack/primary residence is one way to do it).

There are many ways to approach or skin this cat.

Typically lenders will say they need to get back to their system/software to determine how much they can back into your maximum loan amount remaining. However, this calculation can have many way of approaching it and depending on the hypothetical you present yourself with you can have a different answer or outcome.

Some examples are:

- Are you living rent free right now? What is your current housing expense? This determines your current DTI because its expenses per month / over monthly income = DTI

- Are those duplexes non owner occupied (investment occupancies) ? Why? Because the way 1-4 unit lenders calculate non owner occupied properties is different than if you lived in one of these duplexes. The rental income is calculated WAY more favorably if you dont live there. This is one of the advantages of buying as non owner 1-4 unit financing because of the favorable calculation versus buying as a primary residence. Most folks know the advantages of buying as a primary residence is that you get to put lower down payment and you get a better rate but they never talk about the con's which is you get hit with the full PITIA or monthly payment when you live there or intend to occupy the property (this is the con). This essentially means you need a lot higher income to qualify for properties as a primary residence while as an investment property the pro is that you get to use rental income to offset your mortgage PITIA and you ONLY have to qualify for whatevers left if the calculation results in a negative cashflow number (if its positive it actually requires zero income or it just helps your situation ).

So regarding the topic of how DTI affects what you qualify for, yes DTI is the main determinant that will affect your purchasing power so carefully plan your next 5 moves like PBD patrick bet david says but in this context its the next financial strategic moves not PBD's 5 next moves.

Let me know if that helps or questions that arise and someone on our team can help shed some light on this often over looked topic further.

@Matthew Kwan

@Carlos Valencia

Stephen David Smith Jr. · Answer

Hi @Daniel Gibson,

Yes, your Debt-to-Income (DTI) ratio does have an impact on the mortgage amount you can qualify for. Generally, a higher DTI ratio indicates a higher risk for lenders, which generally results in them offering a lower mortgage amount. Conversely, a lower DTI ratio suggests that you have a better capacity to manage debt, making you a more attractive borrower.

Lenders usually have a DTI threshold that you need to stay below in order to qualify for a mortgage. The exact limit can vary depending on the lender and the type of mortgage you're applying for, but a common benchmark is around 43%. If you're right at the upper DTI limit, lenders might be more conservative in the mortgage amount they offer you compared to someone with a lower DTI ratio.

Since you own two duplexes and are looking to purchase a primary residence to house hack, it's essential to discuss your specific situation with lenders. They can provide you with a more accurate assessment of your borrowing capacity.

Good luck with your home search, and I hope this information helps!

Jon Schwartz · Answer

Daniel,

Don't listen to us! Call a good lender and get straight to the concrete answer.

Best,

Jon

Jason Wray · Answer

Daniel,

If you are buying an investment rental you can have a DTI as high as 50% with good credit and assets.  You can also use the rents of the investment property (75% of common rent) as income to help reduce the DTI or obtain a higher loan amount.  When you focus on a 2-4 unit multifamily you actually get a better overall investment that caters to your cashflow and reduces DTI.

I see you are in Tampa I am over in St.Pete let me know if you have any specific questions!

How do DTI levels impact purchasing power/price point?

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