Existing rental properties count as debt or income for new loan?

[David Rutledge]

Hi everyone,

So I am starting to get the ball rolling on my next investment and I am trying to gain some information as to what I can expect to be able to borrow with my current situation.

I am toying with a few ideas. I am thinking about getting a primary residence here in OC with a conventional loan of maybe 5% down or I am also thinking about buying a property outside of OC either in California or inter state as an investment property and putting 20% down.

Irrespective of which strategy I end up going with I was hoping you may be able to answer a few questions to help me get some idea of my borrowing capacity right now.

I purchased two investment properties outside of California in September last year. Both have tenants in place and are rented. I spoke to a bank here in CA a few months back and they indicated that because the rental history of the properties is so limited that most lenders would consider the properties as a wash i.e. not count as a debt but also that the rental income from the properties would not be counted as income therefore basically adding nothing (positive or negative) to my debt to income ratio. I would have had rental income from these properties for about 12 months by the time I am ready to apply for my next loan.

I am wondering if anyone has any experience or knowledge with this type of issue. For people looking at getting investment loans do you know how long do existing properties need to be rented before they can count as income and would lenders potentially count these as a debt, or perhaps neither?

Any help or insight would be very much appreciated.

Thanks so much.

David

[Chris Mason]

Originally posted by @David Rutledge:

Thanks so much everyone, for all your insight. All of this information is really giving me a clear picture of how this situation is likely to play out.

(1) I keep hearing that lenders will count 75%. One of my properties has a 12 month lease while the other is month to month.

(2) Will lenders still recognize the income from the month to month lease if I can show a trail of that rental income?

Thanks again everyone!

(1) Correct, if [ rent * 75% - PITI ] yields a positive number then the real estate is considered an asset. PITI will be completely excluded from your liabilities, and it's regarded as an income-producing asset. That's the formula used until tax returns can show a more clear picture. For example, let's say the math is [ $2500 * 75% - $1700 = $175/mo ]. That's $175/mo of mortgage qualifying income, and the $1700 PITI is completely offset as a liability.

If the [ rent * 75% - PITI ] yields a negative number, that number will be what counts as a liability. Not the entire PITI. So, for example, let's suppose [ $2000 * 75% - $1700 = -$200 ]. That will count as a $200/mo liability, not a $1700 liability. $200/mo isn't necessarily a huge deal, lots of people with $200/mo car payments get mortgages right?

(2) Yup, that's fine.

Re: your more recent post, this isn't a scenario where you have to go portfolio. Agency 30YF should work just fine. The above is Fannie direct, no overlays.