What's wrong with my DTI calc?

[Jay Williams]

Hi all,

Background: 

I've submitted an application for a refinance on a SFH. The house belonged to a grandparent with a reverse mortgage. I'm trying to use a refinance product to clear the balance of the reverse mortgage and pull some cash for minor reno.

Currently house hacking. I understand rental income will only count 75% because of Fannie Mae underwriting. My tenants cover 93% of the PITI of primary residence (70% of PITI under FNMA's 75% standard), but the bank is not recognizing any of this income because on the whole the property isn't covered 100+% by tenants (I rent 2 of the 3 units, live in the last with 2 years of tax returns available).

Question:

Why is the bank not recognizing any of the income, but in turn are recognizing the full amount of PITI against me in the DTI calc? According to the loan officer, there are no questions re: credit or reserves, so I'm at a loss why the DTI calc is not more straightforward.

Best,
Jay

[Chris Mason]

Originally posted by @Jay Williams:

Hi all,

Background: 

I've submitted an application for a refinance on a SFH. The house belonged to a grandparent with a reverse mortgage. I'm trying to use a refinance product to clear the balance of the reverse mortgage and pull some cash for minor reno.

Currently house hacking. I understand rental income will only count 75% because of Fannie Mae underwriting. My tenants cover 93% of the PITI of primary residence (70% of PITI under FNMA's 75% standard), but the bank is not recognizing any of this income because on the whole the property isn't covered 100+% by tenants (I rent 2 of the 3 units, live in the last with 2 years of tax returns available).

Question:

Why is the bank not recognizing any of the income, but in turn are recognizing the full amount of PITI against me in the DTI calc? According to the loan officer, there are no questions re: credit or reserves, so I'm at a loss why the DTI calc is not more straightforward.

Best,
Jay

 Hi Jay,

1) Once you own it long enough for the rental income to appear on tax returns, the 75% rule goes out the window and it's (99% of the time, and you didn't describe the 1%) all about what you told the IRS you make, not what you actually make in rent.

2) Owner occupied math is different than non-owner occ math. Owner occ, the income is added to income, and the debt added to debt. $2000 in rent and $1500 in expenses would yield $500 in income for non-owner occ ($2000-$1500 = $500 positive = "offsetting" and yielding income to boot), but 75% DTI for owner occ ($1500 / $2000 = 75%). You owner occupy the triplex, so owner occ math applies. That math is an oversimplification because I have not seen your tax returns, but conceptually correct. This was the same math done when you purchased the triplex, if you purchased it as an owner occ and used the rental income to help qualify.

3) If you want a rational reason why non-owner occ math is more generous than owner occ, consider that non owner occupants have to put big fat down payments down, and have more skin in the game generally. 

4) Rental income (anything about it) is frequently overlayed.