DTI max out before reaching maximum number of mortgages?

Question

Hi everyone. I have been studying the craft (reading books and listening to podcasts) and have heard it mentioned that some people will surpass the threshold for their DTI radio (~36%) long before reaching the maximum number of mortgages that major banks will issue (~10). My question is how? As long as folks are collecting more in rent than paying out then each property should actually HELP the DTI ratio, right?

I appreciate anyone helping me understand a bit better. I'm sure I'm missing something here. Thanks!

Kevin Romines · Answer

Okay, let me help you get the specific answers. When an investor buys a property, you get to count rents of that property immediately, either because its currently leased or if vacant, the appraiser will show what the current market rents will be on that property.

The formula goes like this Gross Rents X.75% minus your PITI = profit or (loss). If its a profit, it adds to your income. If its a loss, it adds to your liability.

For rentals that you have had for a while and show up on tax returns, the loan officer will use a spreadsheet type program to add in the rents, depreciation, 1 time expenses, subtract expenses, insurance, mortgage interest, taxes and HOA dues. This will result in either a profit or a (Loss). If profit or loss, its factored into income.

These are the 2 methods rental income is calculated. 1) if bought since last tax return (it doesn't show on most recent taxes. 2) If the property shows on the tax return.

Most lenders will go to a 50% debt ratio. However just after the 1st of next year, it is widely expected that Fannie Mae and Freddie Mac will lower their max. DTI to 45%. So buyem now if you can!!!

Chris Mason · Answer

You're right, DTI should not be an issue if you're buying good properties.

Find a landlord-friendly mortgage loan originator local to you, who knows how to do the math right, and there will be no DTI issues provided you are buying good properties and not lying on your taxes.

Something like 90% of mortgage loan originators do NOT know how to do landlord math correctly. None of our pre-licensing education, licensing test questions, or continuing education, asks a SINGLE landlord math question. Kind of like how a general medical doctor probably doesn't know how to do laser eye surgery, and has no reason to.

@Melvin List is in Florida. He's an independent mortgage broker, not a direct lender or banker. That means that he can pull wholesale rates (better than the retail rates/fees you'd get by calling 1-800-Lender directly) from multiple lenders and get you sorted there, in addition to knowing how to do the math right. I've had very good feedback from my California clients I've sent his way for their Florida deals.

Theresa Harris · Answer

Account Closed  Depending on your bank, they may not count all of your rent as income.  My bank counts 50% and also looks at my net income on my taxes.  For most people who have rentals with a mortgage, their cash flow is low due to the mortgage, taxes, repairs.

Craig Jeppesen · Answer

Having a high DTI is a sign you might be over leveraged. I would be more worried about lowering my dti then adding more mortgages.

Spencer Funk · Answer

@Theresa Harris

OK thanks. This is the detail I was missing. My understanding was that the DTI was calculated using gross income. I would have thought full rent would be gross. 50% makes sense though. Very helpful!

Spencer Funk · Answer

@Chris Mason

Thanks so much!

Spencer Funk · Answer

Thanks @Anthony Gayden! Actually there is no problem there for me. I just wanted to make sure that I correctly understood the DTI concept. The logic didn't seem sound as long as properties had positive cash flow.

Kevin Romines · Answer

@Mark Sewell Yes, basically that is correct. However as a loan officer, we always take the annual income and debts and break them down to monthly. But it works the same as annual. But, yes, you have it correct in the way you described it, however you don't count auto insurance, but you do count home owners insurance and landlord policies, anything related to mortgages.

Mark Sewell · Answer

@Ian Middleton

This is good stuff here... learning something.

@Kevin Romines I had been wondering about this -- sort of a chicken/egg thing, when you are trying to qualify for a rental property.  Can't rent it until you own it, and unless you got the cash sitting around (some folks do), then well... it's a catch-22 then. For me, at least, this explains a lot.

So if you aren't getting gross rents that are a good bit higher than your PITI (rents x 0.74%), then your DTI is going the wrong direction.

Kevin, DTI means debt to income on an annual basis, yes?  So if my wife and I are bringing in $100k (example) on our tax returns, then we need our total debts to be at $50k or under?  correct?  So we are adding up everything we pay out, PITI on our primary residence, plus car payments, insurance, the full list, and that gets us to our existing DTI - then we add in the formula for the new property, as you described... is this close?

Theresa Harris · Answer

My typo-it is gross income on your regular job.

DTI max out before reaching maximum number of mortgages?

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