Working on 4th property; issues now with DTI, how to get funding?

[Christian Wathne]

Hi Everyone, Looking for your great advice and experience 

I'm working on acquiring a 4th rental and am concerned that a bank won't finance me because I'm already approaching the 45% DTI limit.

I'm calculating this by taking our (mortgage+tax+insurance on our current properties) divided by (75% of rental income + our w2 income) and I currently come out around 41%. Note; we have no other debt. 

I know there are commercial loans that would look only at the deal and not my personal finances, and there are options for hard money....but I've read about others getting up to 10 properties via conventional lending. Are incomes of these people so high that they stay under the 45%? Is 45% dti not actually a limit? How do I get my next deal financed? 

[Darrell Johnson]

If the lender follows Fannie Mae guidelines, this is one of most interest to you. You may have to help the lender understand it if they are not following it correctly:

https://www.fanniemae.com/content/guide/selling/b3/3.1/08.html#Calculating.20Monthly.20Qualifying.20Rental.20Income.20.28or.20Loss.29

"Calculating Monthly Qualifying Rental Income (or Loss)" "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." "Treatment of the Income (or Loss)" "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 last sentence clearly states that after including the net rental income in the denominator or loss in the numerator, that the rental property mortgage payments are not also supposed to be included in the numerator as monthly obligations. So if your DTI excluding rental properties is D/I, your existing Sch E rental income is $4000/month and ongoing Sch E rental expenses (do not include amortization of expenses already incurred or depreciation) plus current rental PITIA payments are $3,600/month, your new purchase rental income is 75%*$2,000=$1,500/month, and your new purchase rental PITIA is $1,800/month, your new DTI would be (D+($1,800-$1,500))/(I+($4,000-$3,600))

"Rental Income Worksheet – Individual Rental Income from Investment Property(s) (up to 4 properties) (Form 1038)"