First mortgage is ARM. How to calculate DTI for second mortgage?

[John Levonius]

Hello Forum!

I am a long time lurker, first time poster! A quick intro first. I live in California and have been renting for a while. My main interest is to buy a handful of properties, live in one and rent a couple out for a secondary source of income. Not a pro like many of you! But want to diversify away from a pure stock/bond portfolio.

Current scenario:

I am finally in the market to by my first property. I am exploring mortgage options -- ARM vs fixed rate. For instance, 7/1 ARM is being offered at 3.75% for the initial 7 year period, with LIBOR based variable rate afterwards. There is a cap of +/- 5% on the interest rate. Comparing that to 30 year fixed at 4.25%. Motivation for ARM is the lower interest rate & hence more payments towards the principle.

Plan is to buy this first property, live in it for a 2-3 years, then buy a second one for investment (and more later). If I use ARM for my first mortgage, at the time I buy the second property, how will my Debt To Income ratio be computed? Will my debt be based on current payments or the payments with max possible ARM interest rate of 8.75% (3.75+5) ?

Property in California is expensive, so this is important. I may be able to qualify for second mortgage based on my income if first mortgage is fixed; but may not if first mortgage is ARM at 8.75%. I will not have rent payments to show as income at that time; rental will start after I buy the second property.

Would appreciate any comments/pointers. Thanks a bunch.

Cheers,

John