investment property debt - cause issues for getting a home loan?

Question

Hi All,

Apologies if this topic has been discussed before, but I can't seem to find such threads when I do a search. I am a newbie investor looking at buying my first multi-family properties (meeting with lenders, brokers, etc right now). I am also currently renting my residence while keeping one eye open to eventually buy, and I have to ask - do investors run into problems on getting a personal home loan if they have outstanding debt on investment properties?

I have a strong credit score, but am guessing if I buy investment properties first, the debt on those investment properties will be a big factor in the bank's consideration of my personal home loan...is that correct?

Thank you in advance!

Michelle

Curt Smith · Answer

I've been through the underwriting process many times.  Here's the gist and the post Dodd Frank help.

- Qualifying you they take the quick approach first.  They add up all your payments, the min on CC's, all mortgages and other debt.  Calc your DTI.  If it's 43% or lower, they don't bother offsetting rent from the investment mortgages, you're good for another loan.   As long as your total including the new mortgage is under 4.

- If the new mortgage puts you at 5 or more total mortgages then your down goes up and they dig a bit deeper.

- If your DTI doesn't make 43% (or what the bank has chosen.  DF just suggests 43%).  Then they take the rent from rentals that are seasoned longer then 12 months of continuous rent income and they take that as extra income.  DF picked 12 months of renting and they can use that income.

You mentioned MF borrowing..   MF lenders "interview" the borrower (you) and rarely will they lend to a new MF owner /operator, unless you had a "credibility" partner with a percentage on the deal who'll also sign the note.  MF / commercial borrowing is on the DSCR etc of the deal and your credibility, not so much on your FICO and DTI, but does count.

Michelle Watt · Answer

@Russell Brazil - thank you! I heard of the 1.25 DSCR as a necessary threshold, but I wasn't sure if lending standards have since changed. Glad to know this is still current, thank you for the info/verification!

Russell Brazil · Answer

Lenders typically count 75% of the rent into their calculations.  So you need a 1.25 DSCR (Debt Service Coverage Ratio) to have the property to them appear as even.  A few quick examples.

Monthly payment is $1,000 and rent is $1,000....a lender sees this as -$250 a month on your debt to income ratio.

Monthly payment is $1,000....rent is $1250...this is even and will have no impact on your debt to income ratio.

If you have a DSCR on the property greater than 1.25 then they will consider this as more income, and it will increase your borrowing capacity for your own home.

Curt Smith · Answer

@Steven Gillmer

I just asked a loan officer:

For FHA the rule of thumb is 28/45  Housing around 28% of Gross Income, total Debt to Income not to exceed 45%

It  varies a lot with credit score, and assets.. we get them to approve at a  > 45% DTI all the time. But it depends on the specific situation.

This all I can gather for you.  I'm glad Dodd Frank didn't hog tie the banks and I read between the lines above that lenders have flexibility.  Good luck.

Michelle Watt · Answer

@Dan Schwartz, @Walker Seid and @Vincent Crane - thanks for the response. It's good to know it can be done, I was just hoping to get more informed on any potential issues before going in and talking to the lenders. I feel like it's such a chicken-and-the-egg conundrum...I want to walk in pretty informed on my options so that they'll lend to me, yet I'm walking in to hear about those very options. Thanks for your advice/experience - this is really really helpful!!

@Curt Smith - big thank you for the technicals! Very insightful!

Thanks again and cheers to you all. Best of luck with your investments!

Walker Seid · Answer

I only use conventional financing right now

Steven Gillmer · Answer

Curt, that is great info.  I have a follow up question on the DTI that lenders may use.  In my situation, the only debt I have is my primary mortgage and two investment mortgages.  No credit card debt or auto loans etc.  Will they apply an overall DTI number or will they focus on the mortgage DTI (I have heard banks like to keep you under 28%).  I am sure that each bank will vary but I was wondering if you had any knowledge on what the average bank would do.

Ryan Dossey · Answer

It depends how your rentals are financed as well. Mine are financed through a portfolio lender. I disclosed them to my FHA lender when we were buying our personal residence. He said they didn't come up on my credit report (because they're under my llc) so he said as long as the cashflow covers the expenses they would ignore them.

Walker Seid · Answer

your welcome

Michelle Watt · Answer

@Walker Seid - thanks for the further detail. There's clearly more options/variances between lenders than I initially thought. This is very helpful, thanks!

investment property debt - cause issues for getting a home loan?

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