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Opinions: Is a 42% DTI ratio too much for a rental property investment?

Valued Contributor

Opinions: Is a 42% DTI ratio too much for a rental property investment?

I have been wanting a rental property for several years now, and have come across an opportunity to purchase a friend's home for a fair price. The asking price is $280K, and the home is in great shape, with tons of sweat equity created by my friend. He's not in a hurry to sell, so he's giving me some time to get my financial house in order before taking the plunge on this deal. 

 

So right now, I make about $94K a year, and have the following recurring monthly expenses:

 

Car lease: $1,150

Car insurance: $240

Cell phone: $150 

Credit card minimums: $300 (currently paying about $1.2-2k a month towards the one card I have a 0% balance on)

 

That's pretty much it, and my DTI is at 19% right now. I usually have $2 -$3K a month left over to play with, and have just been putting that into savings ($19K) for a down payment on a property, and buying a couple of big ticket items we've put off for a few years (New dining room table, landscaping, new insulated garage door and opener, restaining the deck... ). For retirement I stick 12% (bump of 3%/year) of my salary into a 401K (~$130K), and have a small trust ($200K growing at about 8%/year) that I haven't touched. My partner handles our current mortgage, so this one would be mine alone to tackle. After all is said and done, I would be looking at a $1.8K a month payment, with PITI and HOA dues. The property would rent for about $1.4K a month, leaving me about $400 in the hole every month. What I would actually do is take that rental income, and apply it as additional principal payments to get the mortgage paid off in 10 years instead of 30, so I could then purchase another property. My goal is to have 5-6 paid-off properties around the western US that are paying for my retirement without needing 401K money, social security, or a dip into my family trust.  

 

In speaking with a Bank of America loan officer this afternoon, they said that a $1.8K mortgage payment is going to put my DTI right at 42%. That would go down to 35% If I start including the $16.8K in rental income per year, but that isn't income I want to have factored into this. I think the initial DTI load is going to be a hard sell to the banks, even if I show them my retirement accounts and trust. I've never purchased a home before, and would likely be putting only 5% down ($14k), since closing costs are going to eat up a significant chunk of my savings. BoA said they can keep the financing conventional at 5% down, otherwise I would have to look at other lenders. I can't go with FHA or down payment assistance on this one, since I have no intention of actually living in the house. 

 

So what are your thoughts on this scenario? 




Starting scores: 552 EQ, 570 TU, 558 EX Current scores (3/24/17): 739 EQ 735 TU 761 EX
Message 1 of 17
16 REPLIES
New Contributor

Re: Opinions: Is a 42% DTI ratio too much for a rental property investment?

The DTI is too high, you likely won't be approved. I have a quick solution, stop leasing cars for a thousand bucks ;-) Seriously that is ridiculous. If you want the house, get rid of the car, buy a beater with cash. Use your trust, pay off ALL your credit cards. Be 100% non mortgage (and you dont have one) debt free. Then go looking for investment property

Message 2 of 17
Regular Contributor

Re: Opinions: Is a 42% DTI ratio too much for a rental property investment?

I am having the same issue with auto loan. It is a single big DTI. I am planning to dump it but I would owed $15k loan if I able to sell it using the market price. The truck is the only vehicle to pull my RV.  I know I made a mistake last year. At the time I didn't think about buying a house but just living in a RV. The second truck purchase putting me in a difficult situation.



Starting Score: (Nov 13) EQ 650, EXP 750, TU 750
Score: (Aug 2, 2014) EQ 722, EXP 780, TU 777
Score: (Aug 11, 2014) EQ 781, EXP 784, TU 779
Score(Nov 22, 2014) EQ 814, EXP N/A, TU 781
Score(Dec 16, 2017) EQ > 720, EXP ?, TU > 730
Score(Mar 10, 2018) EQ 736, EXP 740, TU 724
Score(Apr 7, 2018) EQ 752, TU 750, EXP 753 (missing Citibank acct 10k EQ and EXP, incorrect Limit TU)
Score(Jun 14, 2018) EQ 784, TU 771, EX:777(missing Citibank acct 10k EQ and EXP)
Goal Score: EQ 800, EXP 800, TU 800 | Take the myFICO Fitness Challenge

Merrick -$3050, Barclay - $5300
Message 3 of 17
Valued Contributor

Re: Opinions: Is a 42% DTI ratio too much for a rental property investment?


@chrismeyers2k1wrote:

The DTI is too high, you likely won't be approved. I have a quick solution, stop leasing cars for a thousand bucks ;-) Seriously that is ridiculous. If you want the house, get rid of the car, buy a beater with cash. Use your trust, pay off ALL your credit cards. Be 100% non mortgage (and you dont have one) debt free. Then go looking for investment property


Haha, thanks but I like nice cars Smiley Happy I only have credit card card debt on one card, and it’s 0% until September, at which time it will have been paid off. As high as the DTI is, it still falls under mortgage rule guidelines, and even more so if we did factor in the possible rental income. 

 

Whats funny is is that someone in a potentially more precarious financial situation can be approved for an FHA loan up to 50% DTI, but because I want it for an investment property I have to be more fiscally sound 🙄




Starting scores: 552 EQ, 570 TU, 558 EX Current scores (3/24/17): 739 EQ 735 TU 761 EX
Message 4 of 17
Moderator

Re: Opinions: Is a 42% DTI ratio too much for a rental property investment?


@DeeBee78wrote:

@chrismeyers2k1wrote:

The DTI is too high, you likely won't be approved. I have a quick solution, stop leasing cars for a thousand bucks ;-) Seriously that is ridiculous. If you want the house, get rid of the car, buy a beater with cash. Use your trust, pay off ALL your credit cards. Be 100% non mortgage (and you dont have one) debt free. Then go looking for investment property


Haha, thanks but I like nice cars Smiley Happy I only have credit card card debt on one card, and it’s 0% until September, at which time it will have been paid off. As high as the DTI is, it still falls under mortgage rule guidelines, and even more so if we did factor in the possible rental income. 

 

Whats funny is is that someone in a potentially more precarious financial situation can be approved for an FHA loan up to 50% DTI, but because I want it for an investment property I have to be more fiscally sound 🙄


Actually with good credit you can go to 55-57% back end DTI.  My car kills my DTI as well at 1200 a month, thank god I make good money, but it still hurts it my overall DTI as in the loan process as well now, but I am well within the FHA guidelines for DTI and my score certainly doesn't hurt lol.  With that said I need to either make more money or get a bit cheaper car in the future.. Shrug.

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Message 5 of 17
Regular Contributor

Re: Opinions: Is a 42% DTI ratio too much for a rental property investment?

Hi CreditCuriosity,

 

What you guys say here give me a little bit comfort knowing that my situation is not as bad. My DTI is at 28% currently with personal loans, credit cards monthly payments, student loans, RV lot rental and auto loan. Auto loan covers 15%  $1228 (arrgh) DTI. I still have a bit credit report problem to fix to raise the points up a bit. So at 28% DTI, I should be good right? 



Starting Score: (Nov 13) EQ 650, EXP 750, TU 750
Score: (Aug 2, 2014) EQ 722, EXP 780, TU 777
Score: (Aug 11, 2014) EQ 781, EXP 784, TU 779
Score(Nov 22, 2014) EQ 814, EXP N/A, TU 781
Score(Dec 16, 2017) EQ > 720, EXP ?, TU > 730
Score(Mar 10, 2018) EQ 736, EXP 740, TU 724
Score(Apr 7, 2018) EQ 752, TU 750, EXP 753 (missing Citibank acct 10k EQ and EXP, incorrect Limit TU)
Score(Jun 14, 2018) EQ 784, TU 771, EX:777(missing Citibank acct 10k EQ and EXP)
Goal Score: EQ 800, EXP 800, TU 800 | Take the myFICO Fitness Challenge

Merrick -$3050, Barclay - $5300
Message 6 of 17
Moderator

Re: Opinions: Is a 42% DTI ratio too much for a rental property investment?


@benreilywrote:

Hi CreditCuriosity,

 

What you guys say here give me a little bit comfort knowing that my situation is not as bad. My DTI is at 28% currently with personal loans, credit cards monthly payments, student loans, RV lot rental and auto loan. Auto loan covers 15%  $1228 (arrgh) DTI. I still have a bit credit report problem to fix to raise the points up a bit. So at 28% DTI, I should be good right? 


You have front end dti and back end dti to consider.   Others are way more qualified to answer than myself.  Although front end is mortgage/insurance/pmi/etc and back end is that plus CC bills, student loans, etc..  

 

So is that 28% before house or with the house/pmi/insurance/etc included?  If not you need to figure that into it as well and ideally you don't want to go above 43%, but yes you can go higher if you are in the 700's on mortgage scores and others factors can go into it such as assets, what you currently pay in rent meaning is it similar, etc...Also depends on lender as well, etc.

 

I will leave that for the experts though that work in the indursty I just know what works for me and I am not at that number.

Chase | Citibank | Amex | BofA | PenFed | NFCU | Discover | Barclay's | US Bank | Fifth Third Bank | FNBO | BB&T
Message 7 of 17
Regular Contributor

Re: Opinions: Is a 42% DTI ratio too much for a rental property investment?

The 28% doesn't include the house calculation yet. I am going to get a VA loan. I was preapproved and about the sign the paper work but the house I wanted was sold out. The Veterans United officer told me on the phone that I could get probably around 3.5% or less interest with the scores below before siging off the electronic paperworks for home loan:

Equifax Beacon 5.0 FACTA - 699 (11/06/2017)

Experian Fair Isaac V2 - 728 (11/06/2017)

TransUnion FICO Risk Score Classic 04 - 698 (11/06/2017)

The paper works didn't list out the actual interest though. 

 

Current 03/10/2018

4% FE RV rental lot

24% BE bills

Estimation of DTI including the new home payment

13% FE new home payment

24% BE bills 

 

I am hoping to eliminate BE down but I couldn't only lower it down to 1% around next month mid April.

By Mid Jun I can knock down another 1%

By mid or end of August another 1% I would have 0 credit cards balance!

21% BE bills. The personal loans is fixed so there is nothing I could do. However, by August the house I am planning to buy would be gone. It is 30K more than the previous house I was planning to buy. My credit scores so be a lot better than right now by then but DTI is only 3% less. 



Starting Score: (Nov 13) EQ 650, EXP 750, TU 750
Score: (Aug 2, 2014) EQ 722, EXP 780, TU 777
Score: (Aug 11, 2014) EQ 781, EXP 784, TU 779
Score(Nov 22, 2014) EQ 814, EXP N/A, TU 781
Score(Dec 16, 2017) EQ > 720, EXP ?, TU > 730
Score(Mar 10, 2018) EQ 736, EXP 740, TU 724
Score(Apr 7, 2018) EQ 752, TU 750, EXP 753 (missing Citibank acct 10k EQ and EXP, incorrect Limit TU)
Score(Jun 14, 2018) EQ 784, TU 771, EX:777(missing Citibank acct 10k EQ and EXP)
Goal Score: EQ 800, EXP 800, TU 800 | Take the myFICO Fitness Challenge

Merrick -$3050, Barclay - $5300
Message 8 of 17
New Contributor

Re: Opinions: Is a 42% DTI ratio too much for a rental property investment?

Good to know on the credit cards. Do you have any other debt at all you haven't told us about? I will say this, thanks in large part to the fact that you have no housing expenses at all, you are actually in a pretty good financial situation. You have a solid income, and a solid retirement strategy, but youve got to get your cash flow under control. First of all, you should easily be able to save a full 20% down payment on any property with your stats. You should not be paying PMI. The only reason you can't is the 1500 a month+ expenses for car and debt servicing. BTW You're not going to be able to factor in your rental income. You haven't rented before, there's no history, its hypothetical. Lender won't let you count it. 

Message 9 of 17
Regular Contributor

Re: Opinions: Is a 42% DTI ratio too much for a rental property investment?

I would have to say that a loan for an investment prop should require 20-30% down.

Of course there are ways around it, but no way to include the rental monies as income....as

that would then say you are "self employed" as investment. Which would be 2 years, but

prob skirted around at at least one year.

 

I agree at minimum 20% down would be great for no pmi, but it should be requirement.

 

I think there are many ways to achieve purchase of this prop but be very careful on

uses and wording as not to tip off the fine print of the loan...which could lead to issues.

 

Sorry, the wording I used may not be able to be understood easily, but wish you the best!

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