Bank lending and debt/income ratios

[Ryan V.]

I am looking to get pre approved to purchase more investment property. I would prefer going through a national bank because they offer amortizations up to 30 years, but I am not against going through local banks because that it what I have done thus far. One only goes 15 years. The other will go to 20. I want the option to go to 30.

I currently have a 8 mortgages. I have one mortgage on a mobile home park, three mortgages on three sf homes through a local bank, two mortgages on two homes through a private lender, one mortgage on four units through a private lender, and one mortgage on 5 units in an LLC through a local bank.

My credit score is over 800. What is the bank wanting to see as far as debt to income and other criteria. What's the highest debt/income ratio and how do they determine that. I have been a landlord for seven years and all income/expense is documented through tax returns for each property for at least three years. All my income comes from rent from rental property.

Do banks only take a certain percent of rental income when figuring my debt/income? Basically, how are they going to analyze me?

Thanks for any help!

[David Beard]

Ryan, for a conventional loan (30-year fixed) on a 1-4 unit property: To determine qualifying income on your existing rental property, they'll want to use your tax return history, since you have 2+years ownership history. They'll probably prefer that you've done your 2011 taxes. They'll first calculate average Net Operating Income, computed by property, from the previous two years tax returns. NOI = Taxable rental income + depreciation + interest expense. Then subtract your P&I from NOI to arrive at Net Cash Flow. If NCF is positive for a property, it is added to your income, if it's negative it's added to your debt payments.

For your new subject property, since you have experience, they should take the market rent as determined by the appraiser, multiply it by 75%, then subtract PITI to arrive at NCF. If it has current tenants w/ leases, they'll use those instead, unless they're higher than the appraiser's market rent.

Standard ratios are 28% for the front end ratio (only picks up your primary residence PITI+HOA expense as debt), and 36% for your back end ratio (all debt payments). These can be relaxed some if you have excellent credit. Back end can technically go to 45%, I think, but only if excellent credit and compensating factors that will improve the ratio in the next 12 mths, for example. I'd assume you might be permitted perhaps 32% & 40% for the limits on the two ratios, assuming excellent credit as you state you have. But no guarantees on what they'll do.

Since you already have 4 financed properties of the 1-4 unit type, the underwriting process becomes more restrictive regarding LTV, cash reserves, and credit really needs to have no blemishes. You'll have to call around to find a lender that will do loans when you already have 4+ financed properties (of the 1-4 unit type). Citimortgage is a national lender that will do it, many banks wont' do loans beyond your 4th due to the onerous underwriting.

A local bank doing a portfolio loan can be more flexible, particularly since you have strong experience, though they'll still place strong reliance on the NOI from the tax returns. They'll compute the same debt ratios, but they'll also compute your Debt Service Coverage Ratio (NOI/P&I) for your subject property, and for your aggregate property portfolio. Your subject and global DSCR will need to be at least 1.25 to 1.35 typically. Aside from income metrics, banks are also pretty obsessed with collateral quality these days, so it will be a good idea to only show them C+ or better, as far as location, and property condition/age.

The typical local bank will offer both conventional (the 30-year fixed you're looking for) as well as in-house (portfolio) loans. It's often two different departments at the bank. You don't have to go to a "national" bank like Citi, Wells Fargo, or BofA to get 30-year fixed rate loans. The local banks and thrifts offer similar (sometimes better) rates on conventional loans. The local banks just sign up with wholesale lenders, or one or more of the big banks, and the local bank just acts as a conduit, immediately reselling the loans as they originate them. Mortgage brokers work the same way.