How lenders typically calculate DTI

Question

Hello, I have 5 mortgages on 8 investment properties, but I'm no longer working a high income job and so I need to pay more attention to DTI for future loans.  I want to verify when calculating DTI, lenders will only look at the monthly principle and interest payments for each of the 5 mortgages and ignore the escrow portion (for taxes and insurance).  Thanks!

Bryan Maddex · Answer

@Archie BarrettJust wanted to say that there are MANY reasons to consider a DSCR loan vs a conventional loan, not ONLY if you do not qualify for a conventional loan due to DTI.Possible DSCR Benefits:Can do cash out refi prior to 1 year seasoning of the mortgageCan do cash out refi with no seasoning of ownership (with some lenders)Can do a loan with much less paperwork (this comes more into play every time you add a property)Can close on a DSCR loan directly in your LLCCan have your DSCR loan not report on credit (depending on the lender)DSCR loans can be cheaper than conventional loans for many credit scores and down payments. If you are not shipping DSCR loans every time you are making a purchase, you may be paying too much.DSCR Loans can do 15% down with no mortgage insurance. Could be a savings depending on the scenario. DSCR Loans can finance property types that conventional loans cannot (non-warrantable condos, condotels, unique properties or mixed use properties...)Jay was going to say those things as other Ifs i am pretty sure!

Carlos Valencia · Answer

Hello Archie,

Even if you had a high income job DTI is always important because you should know where you stand at all times if you want to continue to use conventional financing for your future investments. You can always use DSCR financing where you use the properties rental income to qualify. DSCR loans do not look at your DTI only the rent to mortgage ratio. Lastly do keep in mind when calculating DTI the lenders do use taxes and insurance even if the property is paid off but if you have enough rental income to cover that monthly expense then you will eliminate that with that rental income. Its always good to plan ahead and review your scenario to make sure you are ready to execute your next deal when you come across one rather than just wing in it and find out you are stuck between a rock and a hard place.

@Albert Bui @Matthew Kwan

Stephanie Medellin · Answer

This is referring to mortgage insurance, also called PMI, private mortgage insurance.  It insures the lender against the borrowing defaulting on the loan.  It is paid by the borrower.

Property insurance will always be required in case something happens to the property itself.  Even if a tenant has renter's insurance, the tenant's policy only covers the tenant's personal property.  The landlord always needs insurance to cover the building / home if it's financed.

Stacy Raskin · Answer

If you decide you don't want to or can't do an income underwritten by DTI ratios, a DSCR loan is another option.

More info on DSCR loans: DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth. Here's a bit more in detail about how rates are calculated for DSCR loans:1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs. I've included an example below to help illustrate this.So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.See example below:DSCR < 1Principal + Interest = $1,700Taxes = $350, Insurance = $100, Association Dues = $50Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91Since the DSCR is 0.91, we know the expenses are greater than the income of the property.DSCR >1Principal + Interest = $1,500Taxes = $250, Insurance = $100, Association Dues = $25Total PITIA = $1875 Rent = $2300DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further.

Feroz Penangwala · Answer

Hey there @Archie Barrett,

When calculating your Debt-to-Income (DTI) ratio, most lenders do focus on your monthly principal and interest payments for each mortgage. However, some lenders may include taxes, insurance, and other obligations like HOA fees depending on their specific criteria. It’s always best to double-check with your lender to understand exactly what they consider in their DTI calculation.

Since you’re focusing on DTI for future loans, it could be helpful to explore asset-based lending options where your income may not weigh as heavily in the decision. Let me know if you’d like more info on that!

Archie Barrett · Answer

@Bryan Maddex great points, thank you!  Planning to BRRR and still in the beginning stages - will keep DSCRs in mind.

River Sava · Answer

Hi Archie - Have you considered DSCR loans? Qualification is based primarily on the property not the borrower so your DTI is not applicable

Bryan Maddex · Answer

Renters insurance only covers the renters contents inside the home. Home owners insurance covers the structure so you will always need to have homeowner's insurance on any property you have financing on. Some insurance carriers will have different policies that do not cover contents since the contents are mostly the renters, speak with your insurance agent about coverage options.

There are 15% down DSCR financing options. Rates are higher for these and that can make it hard to achieve a 1.0 or great DSCR Ratio (your income needs to be $1 higher than your PITI+HOA costs). You can do interest only payments if you are close (slightly higher rate yet if you do interest only). I would have to search my 220+ lenders to see if any do a ".75 Ratio" or "No Ratio" loan with only 15% down. I am guessing no, and also guessing if I found a Yes that it would be really high rates.

Julia Lyrberg · Answer

If you're concerned about your DTI, you might want to look into DSCR loans. DSCR loans focus more on the property's income than your personal income or DTI, which could be a great option for you since you already have multiple investment properties. It’s worth exploring if you're looking for more flexibility!

Feel free to reach out if you want to learn more!

How lenders typically calculate DTI

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