Does using a portfolio line of credit affect DTI ratio?

Question

Does using a stock investment backed portfolio line of credit affect the debt-to-income ratio for obtaining conventional Fannie Mae & Freddie Mac loans? I would like to use my line of credit to flip homes and also purchase more rentals with conventional loans. Any advice would be much appreciated!

Jeff Nunley · Answer

Whether it is considered long or short term debt you still need to factor the payment into your debt ratio.

There is a newer alternative to a Conventional loan called a DSCR loan.  Essentially these are commercial loans on residential property.  The lender only looks at the cash flow on the property and not your personal debt to income ratio.  The rates are a little higher in most cases but given the current upheaval in the conventional investment loan market they are much more attractive than they used to be.  These loans are also not limited to a maximum number of properties and sometimes the loan to vlaues are higher on 2-4 unit properties.

Andrew Postell · Answer

@Matt Wells be very careful about who's commenting about what.  If they aren't a lender....then how do they know?  A business line of credit is treated differently.  A commercial loan will treat this differently.  Conventional loans have very specific rules that lenders cannot change or modify.  If you have any doubts....here's the exact verbiage from Fannie Mae:B3-4.3-15, Borrowed Funds Secured by an Asset IntroductionThis topic contains information on borrowed funds secured by an asset, including:• Borrowed Funds Secured by an Asset• Secured Loans as Debt• Reducing the Asset by the Amount Borrowed• Documentation RequirementsBorrowed Funds Secured by an AssetBorrowed funds secured by an asset are an acceptable source of funds for the down payment, closing costs, and reserves, since borrowed funds secured by an asset represent a return of equity.Assets that may be used to secure funds include automobiles, artwork, collectibles, real estate, or financial assets, such as savings accounts, certificates of deposit, stocks, bonds, and 401(k) accounts.Secured Loans as DebtWhen qualifying the borrower, the lender must consider monthly payments for secured loans as a debt.If a secured loan does not require monthly payments, the lender must calculate an equivalent amount and consider that amount as a recurring debt.When loans are secured by the borrower’s financial assets, monthly payments for the loan do not have to be considered as long-term debt.Reducing the Asset by the Amount BorrowedIf the borrower uses the same financial asset as part of his or her financial reserves, the lender must reduce the value of the asset by the amount of proceeds and related fees for the secured loan.Documentation RequirementsThe lender must document the following:• the terms of the secured loan,• evidence that the party providing the secured loan is not a party to the sale, and• evidence that the funds have been transferred to the borrower

Andrew Postell · Answer

@Matt Wells correct.  The taxes and insurance of property #1 will be held against you but the LOC will not.

Matt Wells · Answer

@Andrew Postell Yes! That is exactly the information I was hoping for! Let me know what you think about the following scenario and if it's correct.

I. I purchase the first property 100% paid for with a line of credit secured by financial assets

2. I purchase the 2nd property with 20% cash down payment with a Fannie Mae or Freddie Mac conventional loan.

3. Since the first property I purchased is with a line of credit secured by financial assets, it does not negatively affect my DTI ratio when I purchase the 2nd property with a Fannie Mae or Freddie Mac conventional loan. The line of credit property essentially does not exist when considering DTI for the 2nd property?

Andrew Postell · Answer

@Matt Wells Gah!  Very sorry here. I continually forget about this because it's not too common but I'm glad I posted the actual verbiage above - WHEN LOANS ARE SECURED BY THE BORROWER'S FINANCIAL ASSETS (meaning a 401k or brokerage account), MONTHLY PAYMENTS FOR THE LOAN DO NOT HAVE TO BE CONSIDERED.....meaning, we don't hold that payment against you.  That is Fannie verbiage above and Freddie follows the same rule.  VERY sorry for the confusion here but if a lender follows the actual guidelines (meaning no overlays) then the payment from that loan WILL NOT affect your "debt to income" ratio.  Hope all of that makes sense.

Jeff Nunley · Answer

Whether it is considered long or short term debt you still need to factor the payment into your debt ratio.

There is a newer alternative to a Conventional loan called a DSCR loan.  Essentially, these are commercial loans on residential property.  The lender only looks at the cash flow on the property and not your personal debt to income ratio.  The rates are a little higher in most cases but given the current upheaval in the conventional investment loan market they are much more attractive than they used to be.  These loans are also not limited to a maximum number of properties and sometimes the loan to values are higher on 2-4 unit properties.

Matt Wells · Answer

@Andrew Postell So if my line of credit is secured by my investment account that means it’s not long term debt? The monthly payments on the line of credit will be interest only, so that is considered debt? This confuses me, seems like it says it’s debt and it’s not debt at the same time. Can you give me an example? It would be much appreciated. Thanks!

Matt Wells · Answer

@Andrew Postell Thanks! I keep hearing different things. Some say the security backed line of credit will not go on my credit score and some say it will. I keep finding conflicting info online. Some say since it’s a line of credit it’s not a loan. I am confused honestly.

Andrew Postell · Answer

@Matt Wells yes, the loan payment will count against you in your "debt to income" in 99% of the scenarios here with conventional loans.  Borrowing against an asset is allowed as long as the payment is annotated since that payment is required to be paid back by you.  I hope that makes sense how I am describing it.

Does using a portfolio line of credit affect DTI ratio?

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