Debt to Income Ratio: When does Rental Income Count? And Wages vs.Commission W2 Job

[Theo Hicks]

I have scoured the BP blog and internet and have not been able to find a clear answer to a few questions I have regarding Debt to Income ratio, so what better place to ask than here! So here it goes!

1) I have had a rental property for 3 months. Starting June 1st, I will be bringing in $2850-3000 a month in rental income and the mortgage, insurance, and taxes are $1200. If I were to apply for a conventional mortgage June 2nd, would that $1200 be an expense or would I be able to claim the income? Or will it vary lender to lender? I have heard some lenders require 2 years of rental history while others do not care!

2) I have a base + commission (paid out yearly) W2 job where my commission is MUCH higher than my base salary. When applying for a conventional mortgage, will I only be able to claim my monthly base salary or can I claim my commission as well?

Hope this isn't a newbie question and I appreciate the help!!!

[Ryan Gillette]

1. DTI on a conventional investment is 45% max. You'll need to use a Fannie Mae lender. The way Fannie Mae sees it, if you provide lease or leases for the units, they will allow use of 75% of those leases. So $3000 * .75 = 2250 - 1200 = 1050 income. For an investment property, Fannie will wash the income and expenses. Almost like they would for a business. Which it is. Where the 75% comes from is they assume you'll write off 25% between vacancy and expenses. It's actually conservative, but less so than Freddie which requires the two year landlord history- although Freddie does give the lender discretion to use higher income if they feel it's warranted.

2. Underwriting will generally take a two year average, treating each category separately. And typically we use YTD (2015 earnings) to support, but the average is a 2013 + 2014 / 24 months in terms of your qualifying income because YTD can get skewed by seasonality or a big commission paid year-beginning. Make sure you wrote off any 2106 loss on your Schedule A, that it's being removed from your commission income. I'll give you an example. Let's say

Base 2014: $50,000

Base 2013: $40,000

You'd use: $3750/month

Commission 2014: $20,000

Commission 2013: $15,000

You'd use: $1458.33/month

2106 loss 2014: $1200

2106 loss: 2013: $1000

You'd use: -$100/month

Altogether, the underwriter will qualify you with $3750/month in base wages, and $1358.33/month in commission.