Investor Debt-to-Income (DTI) Math Primer

by | Mar 13, 2020

The infamous “debt to income” ratio math is more generous when buying/refinancing non-owner-occupied real estate than owner occupied. If we assume a property with gross rents at $3500/mo and a PITI of $2000, the pure investment property math would have us multiple $3500 by 75% and subtract the $2000. The $625/mo in positive cashflow left over is added to income, and there is no liability. DTI would improve.

The math for owner occupied real estate would have us add $3500*75% to income and add $2000 to the monthly liabilities. DTI would typically get worse. This slight math difference is why folks that have the capital for the larger investment property down payments can support five or ten mortgages, whereas those struggling to amass 5% or 10% down (owner occupant down payments) might have trouble qualifying for two or three mortgages.

Interestingly, if you’ve read Robert Kiyosaki’s book “Rich Dad Poor Dad,” this approach is what he describes as well. Fannie Mae math is exactly aligned with the Kiyosaki approach to assets and liabilities – rental properties are an asset; a primary residence is a “liability.” (No commentary on some of the more implausible anecdotes contained in the book).

The difference in how the arithmetic is done is so significant that we have clients with little or no “day-job” income that can obtain investment property financing, but not primary residence financing.

Most lenders have “overlays,” which are lender-imposed restrictions above and beyond basic Fannie Mae and Freddie Mac requirements. We work with some of the best-in-class and best-in-rate lenders that have no or minimal overlays.

Once the first property is owned, for those that have access to the capital (including funds borrowed from a colleague or family member), we have various methods to put that capital to work paired with Fannie Mae financing on investment properties. For those that have access to the capital, assuming a local investor-friendly lender, DTI is typically (but not always) a non-issue.

We are an independent mortgage broker in the East Bay Area right next to Oakland, but we lend throughout California.

Schedule a free 30 minute consultation with Chris Mason for an “Investor DTI Consult”.

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