How long before lenders count rent income towards DTI ratios?

Question

How long does it generally take before lenders start counting your rental income ?

i recently purchased a new primary residence and rent my original home. how long do i need to be renting that original home for before lenders start letting that income count towards ratios like debit to income ? Do they count this income at full value or do the discount it since its not guaranteed ?

Shaun Weekes · Answer

@Matt F.If the bank you're dealing with has no OVERLAYS, then it's 1 day. For conventional they will use 75% and for FHA they will use 85% of the lease agreement towards your income.I wrote a blog about this over 2 years ago if you want to look it up Sir.I hope this helps and have a great day.

Brie Schmidt · Answer

It depends on who they are selling it to. Some will make you wait two years and others can count it immediately (more common) For the first year they do 75% of monthly rents - PITI = monthly income or lossAfter that they go off what you reported on your schedule E. Gross rents less expenses, add back in interest, insurance, taxes, depreciation (divide by 12) and then minus PITI

Chris Mason · Answer

Keep in mind that lenders are going to use the lesser of current leases in place (if applicable) or appraised market rents. Vacant units, we just go off of the appraisal. All using this as purchase criteria will let you know is that you will not have DTI issues introduced by the acquisition of the property in question. This is in part how wheelers and dealers can keep acquiring properties with no loan contingency. If you just got a mortgage last month, and both that property and this next one follow the rent * 75% - PITI(A) rule, it's not too crazy to write offers with no loan contingency (assuming you didn't finance the purchase of a new Corvette, etc, in between). Speaking of DTI issues: If it's a BRRRRRRrrrrrrrrrrr, make sure when you do your taxes that you report renovation costs on line 19 of schedule e, not line 14, in the form of a "See Statement 1" that lines up line-by-line 100% with invoices or receipts that you keep. If you put it on line 14, an underwriter might default to assuming that these are recurring (not one time) expenses, which could trash your DTI.

Dan Schwartz · Answer

One of my criteria in screening properties is that the rent*75%>PITI. Most decent properties hit this anyway, but it's certainly something I measure as part of the evaluation.

Brendan Harrison · Answer

Agreed with Brie Schmidt . I've seen 12 months in some instances, but every bank is different. My recommendation is to call 20 banks and ask what their policy is. Make a spreadsheet to track & keep tight notes bc you can always circle back around to them for a different loan you may need some day. Typical banks that hold portfolio loans are willing to move more quickly with less seasoning bc they are (usually) local & will look more closely at the value of the property as opposed to straight debt to income ratios. Check out BP Ep 55 - some solid insight on procuring financing from a commercial underwriter. Most importantly...Do Not Give Up until you find the bank that will loan on that property!! Good luck!!

Shaun Weekes · Answer

Your jobs income will offset the rest. Plus when you move out your room will be rented for additional income which will help even more.

Juan Abreu · Answer

Sorry to jump back on this thread after so long. I'm currently house hacking my 3/2 house. I live in one room and rent the other 2 out (have leases and everything) but my tenants only cover about 85% of my PITI. Based on what you guys say here, this would not help offset my future DTI at all? @Chris Mason @Shaun Weekes @Dan Schwartz

Dan Schwartz · Answer

Matt F. It's not anything special, and I'm not surely it's widely mentioned. A D-class property would almost-certainly pass the screen, so it's not necessarily a screen for quality. It's as Chris M. said: solely a tool to make sure you can turn around and start financing the next property the next day. We don't move anywhere near that quickly, but since we finance each property on one income at a time only, it's important that no property negatively impact DTI.

Brendan Harrison · Answer

Matt F. That is correct! Use that .75xPITI math as a typical rule of thumb for how a bank will consider that property re: your DTI ratio. As an aside, for your own calc's on calculating the cashflow of a deal, don't forget to include CapEx as you'll eventually need to use it (even if the bank doesn't make you consider it).

Matt F. · Answer

maybe i haven't don't enough reading yet but i don't think i've heard of this screening tool before, so thank you. if i am following this correct, your basically saying look for places where 75% of the rent, is still greater than the PITI on the property. this leaves the remaining 25% for other expenses and then the rest is cashflow?