What all goes into the calculation of a back end debt ratio? The broker i am working with told me it was total debt, from all sources. However, he then included property taxes and insurance (and any other expense for that matter) for my other rental properties. Is that right? If so, i wont qualify for any more loans. Does my question make sense?

Here is my specific situation, and I am trying to qualify for a mortgage (cash out refi) on one of the rentals that i own. I own 4 SFR's free and clear, no mortgage, and am trying to get a mortgage on just one of them. I figure the #'s below will help someone in answering my question(s).

Salary income: $6667/mo
personal residence: $1000/mo (incl P&I, tax and ins)

Front end (?) debt ratio (or he called it housing ratio) is under 28%, good so far.

Other debt payments (auto, credit cards, student loans): $1,500/mo.

Rental gross income (4 houses): $2,700/mo
Expenses: $1,200
NOI: $1,500 (no debt on any of the 4 rentals)

Now I figure he would add the profit/NOI from the rentals to my income (discounting it by 25% or so), but he is adding the gross income (discounted by 25%) to my income, then adding my expenses to the "debt" side of the calculation.

He said the back end debt ratio was the total debt divided by the income. He also said it needs to be less than 40%. If the rental income and expenses are treated like that, then I will soon (if not now) never qualify for another loan because my profits arent going to be 60% of gross income (unless its an outstanding investment). If I have a mortgage on any of em, then it drops even further. Does this make sense? What he did was:

Add my salary to the discounted rental income (6,667 + (2,700- (2,700x0.25)) = $8,692
Add up my mgt, my debt payments, and my rental prop expenses: 1,000 + 1,200 + 1,200 = $3,400

He says that equals a 39% back end debt ratio, which is just barely under the limit, but then he said he has to add the payments of the new mortgage I am proposing to get, and it puts me over the 40% threshold, and thus I wont qualify.

Huh? I understand the math, but cant see how this is really the situation. Why isnt each rental treated as its own "business" and the NOI from each is added to my income (after what I assume to be industry standard discount of 25%)? Everything is making money, and I just want to take advantage of leveraging the rentals a little bit. When getting a mortgage, isnt the property income and expenses the most important thing? Incidentally, the mortgage I am looking to get is just a $30K one, so the payments would be around $180/mo.

Please help me understand what my broker is telling me. I feel as though I am missing something fundamental here about how a borrower is evaluated by a lender.

Thanks in advance,

JP

Wow sounds to me like you need a new LO. Some lenders will allow up to 40, 45, 50, 55% Back End Debt to Income. He just needs to find the one that suite your needs. He also needs to understand that since you own 4 homes outright than you getting a 30K loan is no problem and an easy close. Yet, He probably does not want to do it because 30K will not generate him any $$. So you probably have a quick buck type of LO instead of a Friend for Life LO. Not saying you need to call your LO everyweek to see how the wife and kids are doing. But an LO who doesnt care what type of loan you want as long as its in your best interests. Cashout Refi on a Rental is no problem. I know many LO's that would love to do that all day. But some are money generated so I suggest moving on to a LO who will say yes! That being said if your properties are in CA, NV, HI, or VA call me we can close this together

Jason Andrews
Loan Consultant

Thanks, but they are in NY. I thought about that concept myself, and I wish I had a lender/broker that was looking for a business relationship that would lead to more deals (4 houses is not enough for me, heh)

Still, did my main question get lost in the shuffle? When calculating a back end debt ratio, does your discounted rental gross income get added to your other income, and the property taxes and insurance get added to your other debt payments? (as opposed to just your net profit being added to your income?)

JP

JP,

Your broker is correct in calculating your debt to loan ratio, however there are major flaws in what he is trying to tell you or what you are understanding from it.

1. Your discounted rental income gets added to your other income but please check whether you taking your net salary in consideration or gross salary into consideration.

2. If all your properties are standing free and clear and generating income, then I see no problem at all why you should not be able toget a mortgage line of equity for $30,000. This is the reason why people own properties, to pull out cash when they need it.

However, there may be more to this than meets the eye.
1. Your lender may not want to do a small deal for $ 30,000 for thats no large $$ for him.

2. Inspite of your personal Networth, your FICO scores may be unsatisfactory to your lender. This could be because of many reasons.



Its hard to tell, without knowing your background too much, but these are my guesses.

We are a Nation Wide Lender with branches in New York and Chicago. If you need more assistance and direction, feel free to contact me directly.
Riti Madugula
SVP