How Acquiring Rental Properties Affects Debt-to-Income Ratios

Topics Discussed:

• How are debt-to-income ratios are affected as you acquire more rental properties?
• At what threshold does Fannie Mae reject a loan because of debt-to-income?

Watch the full episode here: https://youtu.be/tM3iyoxhBd8

How Does Owning Rental Properties Affect Debt-To-Income Ratios? 

You inadvertently danced around the debt-to-income ratio. When we qualify for a commercial loan, this is referred to as a global underwrite. The bank looks at you, the asset, they take everything into account. 

The kind of loans that we're talking about on Fannie Mae... I think credit score and debt to income ratio are what is like 95% of this equation. Maybe more. a lot of times people worry, "well, I get more properties and more debt. It hurts my ratio." Now, if you're buying good investment properties, wouldn't your debt-to-income ratio be getting better the more debt you get?  

Lane Aldrich: Better or essentially just stay the same. We're only using 75% and you've got that Delta that we just must essentially eliminate for those, those conservative purposes. Someone can come in and say, I want to qualify for a primary residence, and I look at what their debt to income ratio is adding that primary residence or that new housing expense. 

And let's say it's 31%. Let's say that this house, uh, principal interest taxes, insurance, any, any debts, the individual has car payments, student loans, credit cards, personal loans for a new Mastercraft boat, or maybe not. scrape boat. Uh, all that total is 31% of the individual's gross monthly income, right? 

So that's what you pinpoint is their debt-to-income ratio. Then they can come in and say, now I want to add a fourplex and I go ahead and add what this potential fourplex would add from a cost perspective. Um, and then the liability perspective, as far as the monthly payment principal and interest taxes, applicable HOA dues, then I can plug in the applicable rents that I can use to offset that. 

And this individual's debt to income ratio could still just be right at 31%, um, net, once you have built this fourplex and you, it is considered a retained property at that point, if you have it at that point and you don't lease it out well, then your debt to income ratios are going to be completely out of whack because you have a non-performing asset regardless of income for the debt, right? 

At that point, once you have, have completed the fourplex and you refinance and you own it, and you want to go buy an additional property after. You're going to have to show leases to be able to offset that payment. That's when that becomes important, but at the time of completion and turnover, it's just whatever an appraiser says, fair market rents are. 

And that's been wonderful, um, with, with us understanding that and the banks working with us and, and working on these pre-approvals for investors it's helped us get more aggressive with qualifying and getting individuals to build a bigger portfolio than I think they thought was possible. 

What debt to income ratio makes Fannie Mae say "no more. We're not doing this loan."?  

Lane Aldrich: You can get up to 48-49%, which is pretty ludicrous in a lot of ways. I like to cap it at 43-44%. Because on the front end, when, when you're, when you're prepping to build a four-plex, there's, there's a three-to-six-month process, then you break ground, and then there's another transaction that takes place upon completion. And so, when I'm doing a risk assessment to see if somebody qualifies, it's a dynamic approach because I must see, does this person qualify now and if their income or expenses trending in a way that they will likely qualify again for the refinance a year after that. 

I do like to leave a little bit of wiggle room in case someone's expenses do fluctuate. But I'm trying to typically hit the 43% number for the type of product that I am pre-approving for.