How to use income from current rental for future loan

Question

I've had my first rental for over a year right now.  I've been told that lenders will factor in my rental income into my DTI to help secure a loan for another property purchase.  A couple questions:

1) How long do I have to own my current rental before that income can be used for my DTI

2) Where do they get the income number from... is it net operating income, etc?

Harjeet Bhatti · Answer

The lender will take income from Sch E if its on your tax return. If its not on your tax return and its for short period of time than 75% for your  gross rent.

Lesley Resnick · Answer

You have identified a common problem in the RE conventional lending world.  It is the reason why most people quickly get shut out of cognitional lending.  Debt to Income is a losing proposition for investors.  The metric is around $2 in earnings for every $1 in debt payment.

if you had a property with a $1000 a month mortgage you would need $2000 a month in income.  The W2 employee income is counted.  Some lenders do not count all rental, income they take part or unless it is rented for 2 years they will not use any.  Some take out depreciation which hurts the loan qualificatyion.

1k a month payment  = 200k property

2k a month rent incoming

1k a month in P&I

300 Tax and ins

net income  700 a month - there are obviously other expenses, but it works for the example

In this case the income is 1300  a month short to buy this place.  You will need to use your other income to qualify for this loan.  This is why you will so many private lenders who only want to qualify based on the deal.  They are typically looking for the rent to be 1.1 -1.25 of the mortgage.  Their goal is the property should be self supporting.

Chris Mason · Answer

Zero days.

1) Find a REI friendly lender.

2) GOTO 1

Ryan Moore · Answer

Thanks.  I did file a Schedule E this past year, but I reported a loss because of inherited vacancies and repairs needed.  Things are running smooth now.  I'm sure it varies lender to lender, but will they take that into account, or does having the loss reported not bode well for trying to increase DTI.

Chris Mason · Answer

Hi Lesley,

I understood what you said, but that portion in bold is a result of a combination of either incompetence on the part of lenders, and/or investors buying real estate that does not cashflow, and not fannie/freddie rules.

Good properties ARE cashflow positive, which IMPROVES debt to income, IF the mortgage math is being done correctly.

We've done fannie/freddie conforming compliant loans on investment properties for unemployed stay at home spouses, only using rental income to qualify them. I'm certain that I'm not the only one.

The next time you have a REI that has been told they "can't" qualify due to DTI and having a few rental properties, I might suggest finding a REI friendly lender (on here, at a REIA meetup, etc) from Florida and getting a second opinion. The guy that brings donuts to the real estate office to drum up business is unlikely to be REI friendly.

Lesley Resnick · Answer

Hi Chris,

I may have not been clear in my explanition.

In the conventional mortgage (FHA, Fannie / Freddie) world.  A key factor is debt to income.  For every 2 dollars you earn (profit on your rental or employment income), the bank will lend you 1 dollar of payment (in the form of a loan).  Most properties are not that profitable after debt service.  Therefore, you have a diminishing ability to borrow conventional money as you buy more properties.  It is deigned that way.  It manages the banks risk and limit the number of properties one can afford.  There is also a ceiling the number of conentional mortgages one person may hold.

As a result of this, a second market of non-traditional lenders has developed, hard money, portfolio loans, etc.  These types of loans do not look at debt to income or credit score.

Chris Mason · Answer

Hi Lesley,

You're turning business away if you're telling people that. I'd suggest adding an investor friendly lender to your toolbox. In general if a REI is buying cashflow positive real estate and their financial situation hasn't deteriorated since they purchased their primary residence, it's usually just the down payments that limit their ability to get additional mortgages.

Justin Schaefer · Answer

Thanks for bringing this up.  This is curiosity I've had too.

Ryan Moore · Answer

It's my first so I can understand the conservative approach from them.  Fortunately I can use my good W2 job to help push past some of those hurdles, but I'm starting to get close to maxing that out.

How to use income from current rental for future loan

Most Popular Reply