DTI Ratios For FNMA Loans When Borrower Has Rental Properties

[Bryan Hancock]

Okay...With all of the threads going around about FNMA properties 5-10 I wanted to clarify how "DTI" is calculated for rental property for both the front-end and back-end ratios for:

1. Rental Property With Mortgages On Your Credit Report
2. Rental Property With Mortgages Purchased Subject-To
3. Conforming Loans
4. FHA Loans
5. Purchase Money Versus Refinance Money
6. Properties 1-4 Versus 5-10
7. Portfolio Loans On Your Credit Report
8. Commercial Loans On Your Credit Report (personal guarantee)

I don't think that item 5 or 6 matter, but I wanted to ask just to make sure. I guessed on items 7 and 8. Here is what I think happens:

1. Count 75% (non-FHA) of gross rents in "Income" for both ratios
2. Doesn't count at all for either debt or income for both ratios
3. Count 75% of gross rents in "Income" for both ratios
4. Count 85% of gross rents in "Income" for both ratios
5. Rules don't change for refi versus purchase money
6. Rules don't change for properties 5-10 versus 1-4
7. Doesn't count at all for either debt or income for both ratios (not sure about this one)
8. Doesn't count at all for either debt or income for both ratios (not sure about this one)

Any clarity that our lender wizards can provide is appreciated. It is completely nonsensical that these ratios are used to me given that 15% and 25% are very skinny and seem to be completely arbitrary. I guess maybe the lenders are just looking at vacancy for the debt service or some such. I would never have thought a simple DTI calculation would be so involved :D

[David Beard]

Hey, Brian A., I don't think that's particularly conservative, sounds very rationale. Taxes and insurance will total 13% of rents, typically (assuming T+I = 2.5% of house value, and your gross annual rent yield is 20%). So 87% * 60% = 52%. This is spot-on the "50% rule", so seems very reasonable. [I do recognize that we're normally buying properties at way under assessed value, and there may be a lag on tax relief as we pursue the appeal of the assessed value.]

Secondly, they *should* subtract the P&I from the net operating income derived above, and your net positive cash flow should then flow to the income (denominator) of the ratio. They should NOT split the P&I (or PITI) into the Obligations and the NOI into the Income, though I believe some like to do this, especially for newer investors. Fannie/Freddie guidelines indicate that Net Positive Cash Flow (NOI-vacancy-reserves-P&I) goes to Income.

My lender at US Bank tells me that for new purchases, or for other properties you haven't owned long enough to have a track record as documented on prior year tax return, they use (per Freddie guidelines) 75% of lease income, and that the 25% only covers vacancies. Then they subtract expenses, replacement reserves, prop mgmt (whether you use it or not), and PITI. Now THAT's conservative. I've asked for a citation as to how they interpret it that way. It's a little vague in this Freddie document, I'll admit:

http://www.freddiemac.com/learn/pdfs/uw/rental.pdf

By contrast, Fannie’s selling guide clearly says that the 25% covers vacancies + maintenance expenses.

At any rate, my working assumption is that as long as I have two years to landlording experience and my properties are cash flow positive even after using a 25% vacancy rate (which they SHOULD BE), that new purchases will always improve my DTI ratios, and the only issue is coming up with more down payments and cash reserves ......