DTI & Timing Refi and HELOC

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DTI & Timing Refi and HELOC

Dan Milinazzo
Pelham, NH · Member since 2010 · 91 posts · 51 votes

I looked at several prior posts, but did not see one with enough of the same variables.  Hopefully someone can weigh in. 

I hold a primary and a 2-fam rental. I am looking to cash-out refi the 2-fam then pull HELOC from primary and 2-fam. Stacking these transactions will definitely impact my financial picture as viewed from the first lender to the last lender so I want to approach this smart. Here's the question.

For DTI, what do most banks use for "Income"? Paystub, AGI from prior year taxes, Gross Rental Income, Schedule E from prior year taxes?

If using Schedule E do they add back in PITI+Depreciation since PITI is already counted in Debt itemization?

My paystub does not truly reflect my annual bonus since its not a part of regular gross pay as it is a one time payment annually.  Obviously just using my gross income based on Salary paints a VERY different picture when it comes to Income if you roll in Bonus and Gross Rental Income.  We are talking a 20 point swing from what I consider "best" case to "worst" case calculations.

So, when I pull the trigger on the Cash-out refi my DTI will increase about 2 points. Depending on the criteria most banks use in calculating DTI this could have a negative impact on my potential HELOC applications.

Can someone shed more light on the income side of DTI?

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  • Eric Figueroa
    Lender · Newport Beach, CA · Member since 2015 · 15 posts · 4 votes
    7y

    @Dan Milinazzo Hello Dan, Most lenders will utilize your bonus income if you can show them that you have been receiving it for two years or more. And yes they will add back in Depreciation, Interest and Taxes since it's already accounted for. Also it may be good to try and calculate hour DTI with both new loans since the calculation is there for a reason rule of thumb is to keep your Total DTI under 50%. Great questions.

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  • Dan Milinazzo
    OP
    Pelham, NH · Member since 2010 · 91 posts · 51 votes
    7y

    @Eric Figueroa thanks for the feedback! I did forecast out the DTI with the proposed cashout refi and that bumps my DTI up by around 1-2 points. Which would still keep me under 50% DTI as long as they calculate the rental income and not schedule e net income and also consider my bonus.

    With the HELOCs though, that wouldn't change my actual DTI until I draw on them right? Otherwise there is no way to calculate the actual debt. If they look at "potential debt" that's a whole different animal as I keep my revolving debt well under 30% utilization and opening two new HELOCs will definitely increase my debt potential significantly.

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  • Alexander FelicePro Member
    Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    7y

    most banks will use the average of your last 2 years tax returns, so if you've been getting bonus' they will count. 

    Most banks will add back non-cash expenses such as interest and depreciation into your cash basis (not principle, taxes, or insurance)

    depending on how strict the underwriter is this may change but, I would assume they will calculate your DTI with all revolving credit maxed out. If we look at a borrower with a big heloc and we know they can't make the payment if the HELOC balance increases, we often make them close it.

    that said, all banks are different. For details of this degree it really comes down to the lender as many will do a tight deal and many will not. Many will give you a lot of wiggle room on DTI and many will not. best to talk to your lender about what they will do specifically

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  • Dan Milinazzo
    OP
    Pelham, NH · Member since 2010 · 91 posts · 51 votes
    7y

    @Alexander Felice@Alexander Felice I sure hope calculating DTI with revolving credit maxed out is the exception not the norm. I dont want to trade off closing some pretty mature credit cards with reasonably high limits for a new HELOC. I did speak with a friend of mine in the lending field and walked through his banks income calc and sure enough the schedule e income gets calculated is a very tricky way that I would be hard pressed to recreate on my own. Hopefully other lenders are a little more straight forward with it. I will pull out prior year taxes though and see how that changes my picture.

    I greatly appreciate the input. It's a multi step plan and each step of the way it is massaging my credit profile so I just want to be smart about it without dragging everything out too much because I dont want to cut too deep into my credit or DTI because that really pumps the brakes on the next step.

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