How I thought DTI was calculated is wrong?

Question

Income:

-$3,000 ($2,400 after taxes) salary

-$500 ($400ish after taxes) dividends/commissions

-$1,575 in rental income for my owner-occupied duplex

Debts:

-$950 mortgage for my duplex

-$50ish for min. c.c payment

How I thought figuring out DTI was: $3,000 + $500 + (1,575 * .75 - 950 = 231); since I have a positive cash flow I would have a DTI of 50/3,731 = 1%... Then with each cash flowing property I have my income would rise while my debt would stay very low

Questions/What I'm being told by my potential heloc lender:

1. Income is after taxes so $2,800 and not the $3,500 I was anticipating

2. They base it off of the last 2 years of Schedule E... Rents + Depreciation - Expenses... then the mortgage is added back to the debt??? That would mean I can't even get a 2nd property???

3. The only way I could see my mortgage getting added back to the debt is if  it's because it's owner-occupied? I'm hoping that she's wrong and that rental properties if they cash flow would be added to my income and the mortgage wouldn't be added to my debts?

4. She said we have to wait to see my exact debts until my credit is pulled... My only debts that occurr monthly are technically my mortgage which pays for itself and the minimum balance on my c.c. What else could they possibly count as debt from my credit report?

If you have answers to any of my questions or exactly how the DTI was figured out for you that will be helpful, thanks!

Kevin Romines · Answer

This is how the income and debt ratio is done on a conventional purchase or refinance cash out or rate and term.  HELOCS really shouldn't be any different, but some lenders have own unique ways of calculating income depending on the type of loan that it is?

- Salary - if its a field that you have had 2 years or more experience in, we can count the gross amount at face value - $3000.00

- Commission - A minimum history of 2 years of commission income is recommended; however, commission income that has been received for 12 to 24 months may be considered as acceptable income, as long as there are positive factors to reasonably offset the shorter income history. Commissions will be averaged over 24 months.

- Rental income - Based on what you described the property as. it would be the following:

Federal Income Tax Returns, Schedule E. When Schedule E is used to calculate qualifying rental income, the lender must add back any listed depreciation, interest, homeowners’ association dues, taxes, or insurance expenses to the borrower’s cash flow. Non-recurring property expenses may be added back, if documented accordingly.

If the property was in service

• for the entire tax year, the rental income must be averaged over 12 months; or
• for less than the full year, the rental income must be averaged over the number of months that the borrower used the property as a rental unit.

So that means you take the profit or loss and add back listed depreciation, interest, homeowners’ association dues, taxes, or insurance expenses to the borrower’s cash flow. You then count the full amount of the PITIA and other debts, such as the credit card debt against all the income, Salary, Commissions, and Schedule E profits with the add backs.

Just using your salary and commissions (assuming 500 a month) not counting your positive rental income, your debt ratio would be 28.71%. Typically your allowed a debt ratio near 40-45% so you should be fine.

When current lease agreements or market rents reported on Form 1007 or Form 1025 are used, the lender must calculate the rental income by multiplying the gross monthly rent(s) by 75%. (This is referred to as “Monthly Market Rent” on the Form 1007.) The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses.

The amount of monthly qualifying rental income (or loss) that is considered as part of the borrower's total monthly income (or loss) — and its treatment in the calculation of the borrower's total debt-to-income ratio — varies depending on whether the borrower occupies the rental property as his or her principal residence.

If the rental income relates to the borrower’s principal residence:

• The monthly qualifying rental income (as defined above) must be added to the borrower’s total monthly income. (The income is not netted against the PITIA of the property.)
• The full amount of the mortgage payment (PITIA) must be included in the borrower’s total monthly obligations when calculating the debt-to-income ratio

If the rental income (or loss) relates to a property other than the borrower's principal residence:

• If the monthly qualifying rental income (as defined above) minus the full PITIA is positive, it must be added to the borrower’s total monthly income.
• If the monthly qualifying rental income minus PITIA is negative, the monthly net rental loss must be added to the borrower’s total monthly obligations.
• The full PITIA for the rental property is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation.
• The full monthly payment for the borrower's principal residence (full PITIA or monthly rent) must be counted as a monthly obligation.

Clear as mud? Actually, its not that hard to figure out. I hope this helps.

This is standard Fannie Mae guidelines, so this is not necessarily how HELOCS are calculated, but it wouldn't be dramatically different though.

Kyle Seidel · Answer

Thanks for the response! That definitely cleared some stuff up for me and when I do the Heloc application soon I'm going to figure out every step of their process.

That's excellent that the mortgage is only added back for your principal residence. As long as I get cash flowing rental properties I won't have to worry about DTI then, thanks Kevin.