Growing portfolio will I hit DTI and DSCR wall?

[Christian Allen]

Recently been thinking about how the bank views rental income and your personal debt to income (DTI) ratio. From what I've read and experienced with my two properties, banks will typically take 75% of your rental income and Fannie Mae guidelines require your DTI to be no greater than 0.43. Based on these numbers the debt service coverage ratio you would need to continue to buy properties without getting closer to the DTI ratio limit is 3.1. The proof for this is as follows. DTI=(total payments)/(total income). In the case of a rental property Max DTI=0.43>=(total payment)/(gross rent*0.75) Solving for gross rent you would get: gross rent= 3.1*total mortgage payment. An example with numbers: Mortgage payment-$1000 0.43=(1000)/(gross rent*0.75) Gross rent=$3100.77 (plug in and verify if you don't believe me) Does this mean for a property to not continue to increase my DTI I need to have the rent be 3.1 times the mortgage payment or am I missing something? Are there lenders who calculate DTI differently?

[Chris Mason]

Hi @Christian Allen,

Someone is showing you bad math. :) Rental income calculations are done wrong by the majority of lenders you speak with. None of our training or formal licensing education covers it. The math you show is for owner occupants of 2-4 unit properties, not for pure investment properties. 

Rent * 75% - PITI.

If that yields a positive number, PITI has already been counted (when we subtracted) and you add that (the resulting positive number) as mortgage qualifying income.

If that yields a negative number, PITI not covered (eg, the negative number) is added as a monthly liability.

So let's say you make $3000/mo and have a primary residence PITI of $1000. DTI is $1000/$3000 = 33%.

And you find a property that the PITI will be $1400, and it rents for $2000.

$2000 * 75% - $1400 = $100.

$1000 / $3100 = 32%.

As you can see, if you are working with a competent local REI-friendly lender that is doing the arithmetic properly, your DTI should be improving with each cashflow positive property you acquire.