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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 4056
Experience:  Providing Financial, Tax & Business advice since 1986
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I am trying to refi for heloc and to calcuate DTI ratio. I

Resolved Question:

I am trying to refi for heloc and to calcuate DTI ratio. I have 2 rental properties that I paid off with a refi on my primary mortgage. I hear Im to get the net income of these properties to add to my income, but the net is really reduce on my tax return due to the mortgage I has on these properties in the past. It seems like double kill to use my entire mortgage payment that includes these 2 properties in the payment and then use the net income on my tax return, reduced by prev mortgages. Do I project rental income based on what I expect to get in gross income? How do banks resolve/handle this? thanks-
Submitted: 1 year ago.
Category: Finance
Expert:  Lane replied 1 year ago.

Lane :

Hi,

Lane :

for Debt to income ratio, they're looking at ability to service the new loan... so you'll want to use NET income (take out the rental expenses, so that you're essentially showing the profit, not gross)

Lane :

Most banks use the following conventions for DTI

Lane :

Total recurring debt divided by gross income is the formula

Lane :

And total recurring debt is defined as ... Debt that occurs periodically, including such obligations as credit card payments, child support, car loans, and others that will not be paid off within a relatively short period of time (6-10 months)

Lane :

And Gross Monthly income is the .... all the money, goods and property you receive during the year before you reduce it by using adjustments, deductions or exemptions. People who use the barter system have to include the value of whatever they have received in exchanged for services as part of their gross income.

Lane :

Generally speaking, lenders like this number to be low -- generally you'll want to keep it below 36, but the lower it is, the greater the chance you will be able to get the loans or credit you seek.

Customer:

Net income this year will be very different than past years as the mortgage on the rentals have been paid off and is accounted for in the mortgage increase to my pri home. How do I account for this? How do I show this via a tax return that shows the rental mortage i as expense?

Lane :

You're looking, of course, at what the DTI will be, AFTER the refi

Lane :

Sorry, looks like our poses crossed

Lane :

Your intuition is good ... What a good underwriter will be lookig for is the DTI, AS it will be going nforward

Lane :

Here ... Use this (again including the numbers as they will be)

Customer:

after the refi there will not be a mortgage on the 2 rental properties so how do I calculate their income?

Lane :

In re-reading your question? ... DTI doesn't come from the tax return (they'll use the return to verify certain numbers) but what they're looking for is that true cash flow number

Lane :

Their income is what it is ... Income without the mortgage outflosw

Lane :

Just use the calculator and put the income in as income, then on the recurring monthly debt number there will be no mortgage payments there

Lane :

they want REAL cash flow for DTI ... DTI is not a tax number, it's a cash flow number

Lane :

Make sense?

Lane :

Just maybe to put this in perspective, for a well managed organization, there are three different income statements - (1) The tax statement (to be able to project what they'll need for taxes AND to prepare returns) ... (2) the GAAP income statement, that helps to truly reflect profitability over a time period, and ... (3) The cash flow statement (which show real cash flows - full mortgage payment, for example, as opposed to just the interest as you would see in the tax statement) DTI is a CASH FLOW number. .. true dollars in vs dollars out.

Lane :

Questions?

Customer:

yes- confirm this then- I will take the gross rental income subtract out projected expenses and use this as income for the DTI..correct? In another property I have only a mortgage with my wife (I got personal mortage from her), do I need to include this in the DTI if we both doing the refi? thanks

Lane :

ON question 1 YES

Lane :

ON the second let e be sure I understand... this is all for purposes of doing ONE REFI transaction?

Lane :

What the bank is trying to get at is how much money is coming into the household (a mortgage between you and your wife is a wash)

Lane :

(and how much is - will be, actually) going out

Lane :

in order to see if that aggregate number is XXXXX 36%

Lane :

You can always manipulate the number, but a good underwriter will want to have it reduced simply to Cash flo out to cash flow in for the household (or for the BUSINESS if the business is not a pass-through entity and can stand on it's own credit) --- The entities that are pass-throughs for TAX purposes, tend to be looked at as transparent (LLCs , S-Corps)

Lane :

TO answer the question, yous you will need to include the mortgage from your wife BUT she gets to include the payments, so it's a wash (AGAIN, unless you've kept this completely separate through a separate entity such as a C-Corp)

Lane :

We've been at this for 1/2 hour my friend and I make 12 bucks here, (and I only get that if you rate the answer as positive) I WILL stay with you as long as you need, but I can't help others while waiting. Can I help you with something else?

Lane :

Hello?

Lane :

Still with me?

Lane :

Let me show you something that I see here:

Lane :
Total Questions: 5

2 Positive Ratings / 5 Answered
Lane :

This tells me that (along with keeping me here waiting for 40 minutes on one $12.50 questions that your propensity not to pay may make this not the best use of my time ... I'll be opting out now... FURTHER, I thionk you have everything you need, regardless.

Customer:

I am multi-tasking between business issues and personal ones...sorry for not giving dediated time. But thanks for the answers. I do now have what i need

Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 4056
Experience: Providing Financial, Tax & Business advice since 1986
Lane and 2 other Finance Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks Mike.

From now on, if you need to do it that way ... the "Question & Answer Mode" where we go back and forth (just not in real-time chat) works great for that.

If you'd like to work with ME again just say "For Lane only," at the beginning of your next question.

Thanks again,
Lane
Expert:  Lane replied 1 year ago.
Hi Mike,


I'm just following up with you to see how everything is going. Did my answer help?


Let me know,
Lane
Expert:  Lane replied 1 year ago.

Thank much Mike.

...glad we got there.

Let me know if I can help more.

Lane

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