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Building an investment property with DTI issues

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oorhett
Regular Contributor

Building an investment property with DTI issues

Looking how to finance an investment property. I currently have a home on about an acre of land it is my Primary residence. we are subdividing the land and want to build another house on it as a rental or just to build it and sell it off but not sure how to get it done due to DTI. 

 

Scenario: 

Income: 

Self $75,000  Current DTI is 36% BK 7 Discharged Sep 2019 (680- 690 scores) 

Wife $50,000 Same as above cosigned on daughters house 36% (Clean credit 740+)

Current Primary residence: Value is $900,000 Debt is $350,000 payment is $2540 (in my name only)

2nd Home: Value is $800,000 no debt (This is in my wife's name) 

Daughters home: Purchased this year $488,000 Value - 580,000 (Payment is $2400 but have renters that pay $2700 mo - This is in My Wife and Daughters name my wife cosigned with her)

The plan is to subdivide the lot our Primary residence is on and build another home on it and have it as a rental but unsure how to finance something like that when I'm pretty sure both my wife and I DTI is maxed out at 36% 

We have plenty of equity in our real estate just looking for a way to pull some of that out to do this and not sure of a way to do it without more income. Only have about 4 months of rental income on my daughter's new place. 

 

 

 




BK 7 5/19 Discharged 09/19
Beginning Scores - EQ 579, TU 565
Current Scores(Vantage, high/current) - EQ 728/690, TU 706/685 / (Fico8/9) EX^8 697 TU^8 677 EQ^9 699
Mortgage (1/24) - EX 720 / TU 727 / EQ 713
Message 1 of 5
4 REPLIES 4
Revelate
Moderator Emeritus

Re: Building an investment property with DTI issues

This isn't really the forum for that.

 

You have a ton of equity in the homes, the "obvious" answer would be for y'all to take out a HELOC or similar (you probably want something variable right now) and just write a check against it for the new build full cash.  Pay it back out of free cash flow especially when you get the new rental up and running.  

 

Property investment is outside the scope of this particular forum though, there's some good resources out on the net but this isn't one of them for that topic.  




        
Message 2 of 5
ShanetheMortgageMan
Super Contributor

Re: Building an investment property with DTI issues

Most loan programs out there allow DTI's up to 45%, so I wouldn't be too concerned about the 36% figure.  However, you mentioned you are subdividing the land your current primary residence is on which appears to also have a mortgage against it.  When you obtained the mortgage they used all of your current land & the home as collateral, so if you are planning on splitting some of the land then your mortgage lender will likely have to approve it otherwise you may trigger the due on sale clause and have to repay the mortgage immediately (consult with a real estate attorney).  In situations like this my past clients have refinanced their primary residence, only using the part of the land & residence as collateral and the other subdivided parcel free & clear, with the subdivision being recorded simultaneously with the mortgage transaction.

 

To accomplish what you are seeking to do you'll either need to qualify for a construction loan or pull out enough equity to finance the construction of the home (be certain to take out enough to complete the entire project).  Regular construction loans to build investment properties are out there but they either follow Fannie Mae guidelines (requiring 4 years from a Ch 7 BK discharge) or have longer waiting periods after a Ch 7 BK discharge, which may just leave you with private money loan options (meaning high rates/fees).  An option you may have is doing an FHA cash out refinance on your current residence (can go up to the lesser of 80% of the home's value or FHA county loan limits) and allows a housing ratio up to 46.99% and a total debt ratio up to 56.99%, and for the second home there are conventional options that are OK with less than 4 years from a Ch 7 BK (usually up to around 75% of the home's value) usually capped at a 50% DTI.

 

How long your daughter's home has been owned for, whether it's been reported on tax returns, and how long your daughter has been making the mortgage payment on it will all determine how that home impacts your wife's DTI. 

Free Mortgage Advice & Pre-Approvals (FHA, VA, USDA, Fannie, Freddie, Non-Prime, Construction, Renovation/Rehab, Commercial) since 2002
Located in Southern California and lending in all 50 states
Message 3 of 5
oorhett
Regular Contributor

Re: Building an investment property with DTI issues


@ShanetheMortgageMan wrote:

....How long your daughter's home has been owned for, whether it's been reported on tax returns, and how long your daughter has been making the mortgage payment on it will all determine how that home impacts your wife's DTI. 


Could you expound on this? Wife and daughter have owned the home since May 2022, as a result not on tax returns and daughter has been making all payments since the purchase in May. I suggested to my Wife and daughter that they should open a joint checking account where the rent is deposited and the mortgage payment is deducted, currently it's just going into and out of my daughter's personal checking account. Thanks!  




BK 7 5/19 Discharged 09/19
Beginning Scores - EQ 579, TU 565
Current Scores(Vantage, high/current) - EQ 728/690, TU 706/685 / (Fico8/9) EX^8 697 TU^8 677 EQ^9 699
Mortgage (1/24) - EX 720 / TU 727 / EQ 713
Message 4 of 5
ShanetheMortgageMan
Super Contributor

Re: Building an investment property with DTI issues


@oorhett wrote:

@ShanetheMortgageMan wrote:

....How long your daughter's home has been owned for, whether it's been reported on tax returns, and how long your daughter has been making the mortgage payment on it will all determine how that home impacts your wife's DTI. 


Could you expound on this? Wife and daughter have owned the home since May 2022, as a result not on tax returns and daughter has been making all payments since the purchase in May. I suggested to my Wife and daughter that they should open a joint  checking account where the rent is deposited and the mortgage payment is deducted, currently it's just going into and out of my daughter's personal checking account. Thanks!  


Since it's not yet been reported on tax returns, assuming your wife & your daughter will be on the new mortgage you'd be getting, then the amount of rental income from it that can be used would be 75% of the current lease agreement.  A 25% haircut is applied to due to expected vacancy/maintenance costs.

 

The lease agreement is $2,700/mo, 75% of that is $2,025/mo.  With the total housing payment being $2,400/mo then the $2,025 offsets most of that, creating a monthly liability of $375/mo to be included in the DTI.  If your either your wife or daughter won't be on the mortgage, then you need to reduce the rental income by another 50%, down to $1,012.50/mo and which would then create a monthly liability of $1,387.50/mo to be included in the DTI.

 

Once it's reported on the tax returns then the Schedule E figures would be used to calculate income, rather than the current lease agreement minus the 25% haircut.  So if once the tax returns are filed and on Schedule E there weren't any other expenses other than mortgage interest, property taxes, homeowner's insurance and HOA dues (if any) then you should be able to use 100% of the rent (assuming your wife & daughter split the expenses & rental income evenly and both are on the new mortgage).  If you use 100% of the $2,700/mo in rent, then after deducting the $2,400/mo housing expense it'd add an extra $300/mo in rental income when calculating the DTI.

 

Neither of these scenarios care what account the rental income is deposited into.

Free Mortgage Advice & Pre-Approvals (FHA, VA, USDA, Fannie, Freddie, Non-Prime, Construction, Renovation/Rehab, Commercial) since 2002
Located in Southern California and lending in all 50 states
Message 5 of 5
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