Adding Income to Fix DTI

[Sean McCluskey]

Hey BP,

I want to refinance my primary residence here in sunny Southern California. The only problem is, I have a big $700/month car loan that I took out after getting into the house last fall. The balance is about $35k and I'm only paying 1.99% APR, so it's about as cheap as money can get.

I really dont want to just pay that car loan off, because I can go out and put that money into 1-2 rental properties instead and add an asset that will pay for this liability. I'm just trying to figure out how to best work this using rental properties (OR, would a note(s) be better??)

I'd like to calculate how much rental property income I need in order to "offset" that $700 monthly payment, so that I can qualify for a refinance and reduce my mortgage payments by about $6,000 per year.

Here's my math, can someone please tell me where I'm off base?

$1,200 monthly rent (free and clear) - 75 RE taxes - 60 Insurance = $1,065 * 75% = $798.75

This would appear to immunize your DTI ratio. EXCEPT, you need to account for the fact that the $700 car payment is a larger share of my monthly debts than $800 is a share of my income. Meaning, if you have 4000/10000 = 40% and add $700 to both sides, you get 4700 / 10700 = 43.9%. To keep this at 40% you would need to take the income up to almost $12,000.

Thoughts?

[Chris Mason]

Fannie these days in theory goes to 49.99% DTI, in practice you want to shoot for 47% to build buffer in: taxes for that specific property might be a bit on the high end, or homeowner's insurance might be, or whatever. And sometimes the AUS just gets quirky and won't let you go over 47% for reasons that Fannie Mae does not exactly disclose. Bruised credit might be at 45% or 43%.

So call it $1500 of income to offset the $700/mo liability.

Net rental cashflow works. For a purchase mortgage of a new rental property, the math is gross rent @ 75% minus PITI. The positive number resulting would need to be $1500.

$4000 rent * 75% - $1450 PITI = $1550.

That's an implausible scenario in reality. If you can buy all cash, it's much more plausible.