home loans and your credit

[Ronald Erwin]

hello amazing BP member!! I have a question I dont know if it applies to rental properties. I recently purchase a second home my first one approximately a year and half ago. I wasnt approved for near as much as my first home, they said I had a high debt to income because of the other house how to people keep financing homes and not have this problem???

[Kerry Baird]

I think what you are referring to is "How do people keep buying houses if their DTI is out of whack with each new purchase?"

When I buy a new rental property, I am aiming to get the maximum amount of cash flow from the property. The extra income helps with the DTI.

Each lender calculates the DTI differently, with some including depreciation, or some won't give credit for rental income until you have owned a rental property for at least 2 years.

One lender I used explained to me that when I grab every deduction possible on my tax return to "lower my taxable income" it lowers the income part of the DTI. With the new tax law, this is probably a moot point, as the deduction part has changed.

Different lenders have different requirements for DTI, so while some are ok with say 35% and others will go to 40%.

You can make more money. Get an extra job, get your real estate license as an example. 

You can pay down your debt, but do it one card at a time, because each minimum payment counts against your DTI.

Pay off your car, because that is often as big as a mortgage payment.  When you pay that off, you *do* have a mortgage payment. 

Shorter term loans make for larger monthly payments, so on cars or on investment properties or your own house, get the 30 year loan. If you want to pay them off quickly, pay them like a 15 year. But the monthly payment on shorter term loans influences the DTI.

In my early years of buying houses, I bounced between saving up for down payment funds, and paying off debt.  I used automatic payroll withdrawals into mutual funds, saved Christmas money, any bonus funds, a small inheritance when my grandma died, and so forth...and got super aggressive about saving up for the next down payment.  As we got more houses, and had the cash flow coming in, it got easier.  4 rental houses paid for the 5th if we had a tenant changeover.  

We weren't in a place where we were buying high cash flow properties, but doing so helps to offset the DTI. Our initial strategy was to buy 5 houses and pay them off with a debt snowball method. We've done a lot of different types of deals to include fix and flips, pure flips with no fixing, lease options and so forth. But our original thought will get a lot of people much further down the line toward financial freedom with just five paid for houses.

That’s all I can think of at the moment.  

I look forward to reading about your success!