Rental DTI hampering personal residence search

[Chris May]

I've posted about my struggles with this issue before, but I have a new conundrum that I'm hoping folks here can help with.

I own a high end duplex with correspondingly high mortgage and taxes. The income it generates more than covers all the expenses. The problem is that it has been a ball and chain when it comes to financing for my personal residence.

Conventional financing requires that the duplex debt be included in my personal debt, and the income be included in my personal income. The problem is it makes my DTI ratio look off the charts. If I were able to use the net income only, the DTI looks much more favorable.

Example (not real numbers):

Duplex debt: 600 / mo

Personal residence debt: 400 / mo

Duplex income: 800 / mo

Personal income: 1000 / mo

DTI = (600 + 400) / (800 + 1000) = 55%

If I could segregate off the rental property and just use net income, the DTI looks much better:

DTI = (400) / ((800 - 600) + 1000) = 400 / 1200 = 33%

I've thought about moving the duplex to a C-corp, but that would mean all new financing (if even possible) at a higher rate.

Anyone dealt with this? From a wealth generation perspective the duplex has been great, but it's preventing us from buying a new home for ourselves.

I can't be the first person to have run into this problem. What's the path forward?

[Chris Mason]

Find a new lender. For non owner occ real estate, the more favorable math of using the income to wipe out the PITI, and adding what's left (net positive cashflow) to the income column, is what Fannie requires.

Adding the income to income and debt to debt is for when the rental income is being counted on owner occ 2-4 unit real estate, and is less favorable.

I'd say something like 70% of loan officers are unaware of this or get it wrong. Your local REIA can provide a referral.