Lenders - Settle the score on DTI calculations!!!

[Ryan Randall]

So, I've seen posts run the gamut here on Biggerpockets when it comes to how Fannie/Freddie calculate your DTI including your rental properties.

Let's say, for arguments sake, I have 1 rental property which grosses $2k/mo in income, and has $1k/mo in expenses (for arguments sake, it nets $1k on tax returns). 

Let's say I also make $5000/mo and I have $2k/mo in fixed expenses.

So, lenders, how is my DTI calculated?

Is it  ($1000 + $2000) / ($5000 + $2000) or 0.42%?

Or is it ($2000) / ($5000 + $1000) or 0.33%?

Maybe it's just me, but I'm tired of these different interpretations of how DTI is calculated with rental income from Fannie/Freddie's guidelines. For me, I've assumed (and had my own lenders calculate) the second one or 0.33%. However, I see all kinds of different interpretations here.

I can't help but think that the folks pushing the first one are either doing so out of ignorance, or they are attempting to funnel folks into their own private lending programs out of "fear" that traditional conventional won't work.

Any help is appreciated, thanks.

[Jay Hurst]

Quote from @Ryan Randall:

So, I've seen posts run the gamut here on Biggerpockets when it comes to how Fannie/Freddie calculate your DTI including your rental properties.

Let's say, for arguments sake, I have 1 rental property which grosses $2k/mo in income, and has $1k/mo in expenses (for arguments sake, it nets $1k on tax returns). 

Let's say I also make $5000/mo and I have $2k/mo in fixed expenses.

So, lenders, how is my DTI calculated?

Is it  ($1000 + $2000) / ($5000 + $2000) or 0.42%?

Or is it ($2000) / ($5000 + $1000) or 0.33%?

Maybe it's just me, but I'm tired of these different interpretations of how DTI is calculated with rental income from Fannie/Freddie's guidelines. For me, I've assumed (and had my own lenders calculate) the second one or 0.33%. However, I see all kinds of different interpretations here.

I can't help but think that the folks pushing the first one are either doing so out of ignorance, or they are attempting to funnel folks into their own private lending programs out of "fear" that traditional conventional won't work.

Any help is appreciated, thanks.

 If the property is on your tax returns you use this worksheet with the numbers coming of your Schedule E adding back paper losses like depreciaton  :  https://content.enactmi.com/do...

Simply as that!  If it is not on your tax return it can be more complicated but here are the answers:  https://selling-guide.fanniema...

And you need two things from your loan officer when looking to use rental income. 1. Competency, meaning they understand the above and are able to calculate it. Banks/Credit unions often (not always of course)  have "order taker" LO's which means they simple so not know how the sausage is made so other then simply W-2 income they often do not know how to handle it.

and 2, they need an NMLS number and to have a license in the state of the property. If they do not have those the ONLY product they can sell you is a Debt service coverage ratio loan because in a lot of states you do not have to be licensed to sell those. So, if you have no choice every situation will look like a DSCR loan even if it is not the best product for you.

[Ryan Randall]

@Jay Hurst

First time I've seen this PDF worksheet, thank you for sharing! I'll have to use this prior to my next purchase. Had a lender who calculated my debt against me twice the last time I applied for a loan. DTI went from 49% to 26% after I corrected his mistake

[Katherine Blazer]

@Ryan Randall Just like realtors, not all lenders are created equal. A lot of lenders just work with primary residence borrowers and like cookie-cutter deals... Depending on how your file your taxes, normally rental properties are treated like small businesses. 

Congratulations on buying what sounds like your 3rd property!

[Ryan Randall]

Just actually went through this worksheet @Jay Hurst

This should really be posted on all of those "How do I qualify if I already have xx properties", or "Does rental income hurt my DTI?" related posts. It really gave me the transparency I wished I had in the lending process a few months back. Very straight-forward to follow!

[Ryan Randall]

Quote from @Katherine Blazer:

@Ryan Randall Just like realtors, not all lenders are created equal. A lot of lenders just work with primary residence borrowers and like cookie-cutter deals... Depending on how your file your taxes, normally rental properties are treated like small businesses. 

Congratulations on buying what sounds like your 3rd property!

 Thanks @Katherine Blazer. Agreed that lenders aren't all created equal!

Closed on two 4-unit deals, next house will be my primary.

[Katherine Blazer]

Quote from @Ryan Randall:

Quote from @Katherine Blazer:

@Ryan Randall Just like realtors, not all lenders are created equal. A lot of lenders just work with primary residence borrowers and like cookie-cutter deals... Depending on how your file your taxes, normally rental properties are treated like small businesses. 

Congratulations on buying what sounds like your 3rd property!

 Thanks @Katherine Blazer. Agreed that lenders aren't all created equal!

Closed on two 4-unit deals, next house will be my primary.

 Congratulation! Are they all in New Hampshire? 

[Jay Hurst]

Quote from @Ryan Randall:

Just actually went through this worksheet @Jay Hurst

This should really be posted on all of those "How do I qualify if I already have xx properties", or "Does rental income hurt my DTI?" related posts. It really gave me the transparency I wished I had in the lending process a few months back. Very straight-forward to follow!

@Ryan Randall I talk to people all the time who just assume or have been told they cannot qualify for conventional financing that can. I love DSCR for people who need it, but the megaphone of folks who only know how to or only can sell DSCR is overwhelmingly loud right now and it is a shame. Add the fiction that some how if the DSCR does not show up on a credit report it does not exist has created a LOT of just really bad advice.

[Ryan Randall]

Quote from @Katherine Blazer:

Quote from @Ryan Randall:

Quote from @Katherine Blazer:

@Ryan Randall Just like realtors, not all lenders are created equal. A lot of lenders just work with primary residence borrowers and like cookie-cutter deals... Depending on how your file your taxes, normally rental properties are treated like small businesses. 

Congratulations on buying what sounds like your 3rd property!

 Thanks @Katherine Blazer. Agreed that lenders aren't all created equal!

Closed on two 4-unit deals, next house will be my primary.

 Congratulation! Are they all in New Hampshire? 

Yup, I stick to buying local.

[Dave Skow]

@Ryan Randall

[Carlos Ptriawan]

Quote from @Ryan Randall:

So, I've seen posts run the gamut here on Biggerpockets when it comes to how Fannie/Freddie calculate your DTI including your rental properties.

Let's say, for arguments sake, I have 1 rental property which grosses $2k/mo in income, and has $1k/mo in expenses (for arguments sake, it nets $1k on tax returns). 

Let's say I also make $5000/mo and I have $2k/mo in fixed expenses.

So, lenders, how is my DTI calculated?

Is it  ($1000 + $2000) / ($5000 + $2000) or 0.42%?

Or is it ($2000) / ($5000 + $1000) or 0.33%?

Maybe it's just me, but I'm tired of these different interpretations of how DTI is calculated with rental income from Fannie/Freddie's guidelines. For me, I've assumed (and had my own lenders calculate) the second one or 0.33%. However, I see all kinds of different interpretations here.

I can't help but think that the folks pushing the first one are either doing so out of ignorance, or they are attempting to funnel folks into their own private lending programs out of "fear" that traditional conventional won't work.

Any help is appreciated, thanks.

- There're other lenders just use Schedule E as well
- however lets say your DTI is 50% while their max is 40%, you can still be approved in special circumstances due to your salary/reserves/other circumstances......in my case because I have strong non-salary income that they can't use for FM guidelines. But at the end they still approve me so high DTI is not dead end

[Ari Steinman]

Quote from @Jay Hurst:

Quote from @Ryan Randall:

Just actually went through this worksheet @Jay Hurst

This should really be posted on all of those "How do I qualify if I already have xx properties", or "Does rental income hurt my DTI?" related posts. It really gave me the transparency I wished I had in the lending process a few months back. Very straight-forward to follow!

I talk to people all the time who just assume or have been told they cannot qualify for conventional financing that can. I love DSCR for people who need it, but the megaphone of folks who only know how to or only can sell DSCR is overwhelmingly loud right now and it is a shame. Add the fiction that some how if the DSCR does not show up on a credit report it does not exist has created a LOT of just really bad advice.

@Jay Hurst What do you say about getting conventional financing when looking to purchase the home with an LLC- how do you deal with that?

[Doug Smith]

Recently, they famously tried to add Loan Level Pricing Adjustments (LLPAs) to Fannie/Freddie loans and, thank God, that got rescinded before it went into place. The truth is that there are many ways that income can be calculated and, regardless of what guidelines say, it's somewhat subjective and the interpretation changes from lender to lender. I've been a lender for 32 years and I've been taught and seen many ways to do it. For instance, let's say you have an income of $1000/mo, a car payment of $300/mo, and a student loan payment of $100/mo. Let's also say you deduct the lease payment on the Schedule C of your return as a business expense (legitimate to do). Is your DTI ($300+$100)/$1000 or 40% or is it $100/($1000-$300) or 14.2%. Both are ways that I've been taught by banks. DTI and DSCR arguments are a normal part of being a lender. There's more than one legitimate way to skin a cat. It really is going to depend on your lender and even your loan officer. I wish I had a better answer for you. I know it's as clear as mud, but it's the truth. Good luck to you.

[Jay Hurst]

Quote from @Ari Steinman:

Quote from @Jay Hurst:

Quote from @Ryan Randall:

Just actually went through this worksheet @Jay Hurst

This should really be posted on all of those "How do I qualify if I already have xx properties", or "Does rental income hurt my DTI?" related posts. It really gave me the transparency I wished I had in the lending process a few months back. Very straight-forward to follow!

I talk to people all the time who just assume or have been told they cannot qualify for conventional financing that can. I love DSCR for people who need it, but the megaphone of folks who only know how to or only can sell DSCR is overwhelmingly loud right now and it is a shame. Add the fiction that some how if the DSCR does not show up on a credit report it does not exist has created a LOT of just really bad advice.

@Jay Hurst What do you say about getting conventional financing when looking to purchase the home with an LLC- how do you deal with that?

 @Ari Steinman You have to close a conventonal loan (when I say conventonal here I mean a Fannie loan) in your persoanl name. But, Fannie will also allow the name to be transfered to an LLC without issue:

https://servicing-guide.fannie...

[Ari Steinman]

Quote from @Jay Hurst:

Quote from @Ari Steinman:

Quote from @Jay Hurst:

Quote from @Ryan Randall:

Just actually went through this worksheet @Jay Hurst

This should really be posted on all of those "How do I qualify if I already have xx properties", or "Does rental income hurt my DTI?" related posts. It really gave me the transparency I wished I had in the lending process a few months back. Very straight-forward to follow!

I talk to people all the time who just assume or have been told they cannot qualify for conventional financing that can. I love DSCR for people who need it, but the megaphone of folks who only know how to or only can sell DSCR is overwhelmingly loud right now and it is a shame. Add the fiction that some how if the DSCR does not show up on a credit report it does not exist has created a LOT of just really bad advice.

@Jay Hurst What do you say about getting conventional financing when looking to purchase the home with an LLC- how do you deal with that?

 @Ari Steinman You have to close a conventonal loan (when I say conventonal here I mean a Fannie loan) in your persoanl name. But, Fannie will also allow the name to be transfered to an LLC without issue:

https://servicing-guide.fannie...

 Thanks @Jay Hurst . The question is, can I buy it under my and my cash partners name-two people ( because he really owns a majority interest) take a conventional loan and then transfer it into an LLC that we are partners in?