Posted by John Corey on November 02, 2005 at 10:18:44:
Tom,
DTI is debt to income. If you are buying smart then you are buying properties that have good cash flow. If you can keep the mortgage to 75% or less of the mortgage payment then the lender tends to assume that the property covers itself so has no real impact to your income. This is a crude measure.
The way to keep the DTI in good shape is to make sure the ratio does not change when you buy more. Hence you either need large down payments or properties that are low priced compared to the income they produce. Midwest compared to CA if you want to compare the possibilities.
In the made up example you failed to show the increased income when you showed the increased mortgage debt. Assuming the increase in the debt is not because of a larger primary residence then each rental will increase the debt and the income. All the rent is income. How much is needed to service expenses vs. available to service the debt is a factor.
I’m relatively new into RE investing and here’s my question. I have a fairly large loan on my personal residence (>$600k) and a smaller loan on a rental property. I would like to buy a few more rental properties but as I do, I’m afraid that the overhanging debt will negatively affect me when I try to either refinance my personal residence or buy/sell to move into a new personal residence. Is this a valid concern and if so, is there any way to avoid it? While the rental properties add to my debt, rental income would pay the mortgage so there is no net outflow (unless vacant). My credit and income are outstanding. Thanks for any advice you can provide.
It’s hard to say how much of a hit your credit takes when you are carrying multiple mortgages. Will it drop bellow the fair/good level…probably not. If you are holding multiple mortgages that have not experienced a decent amount of principal reduction then lates on charge accounts, etc., and credit card balances over 50% of the high limit will ding your credit more than usual.
As long as you keep your CC balances low and make all credit payments ontime you should have no real credit issues.
I’ve seen credit reports where someone currenly has 6 mortgages and they had a FICO in the 700 range.
Thanks for the response. Some additional info: we carry no credit card debt, have no late payments, have been reducing principal (I don’t do interest only loans), 800 FICO scores. My concern is will I take a hit in rate when it comes time to refinance my biggest and most important mortgage on my main home? In other words, if I can get a 6% rate keeping the status quo, would getting another 4 houses and $600k in debt make it so I can no longer qualify for that 6% rate. I know this is somewhat hypothetical but a good rate both now and in the future on my main home is important to me. Simple answer of course is get a 30-year fixed on main home and not worry about it but moving is a real possibility in next few years so that doesn’t necessarily take care of everything.
Re: financing investments without… - Posted by John Corey
Posted by John Corey on November 01, 2005 at 17:42:20:
Tom,
I noted that you said you are new to RE investing.
I bring that up because you are focusing on the wrong things. What emotionally is important to you now might be the same thing that keeps you a bit poor compared to how things could be.
The impact to your credit from multiple mortgages is less about the number of mortgages than it is to do with the way you handle the credit and the DTI. If you pay on time or early, if the Debt To Income ratio is lower than average, etc your credit score will be pretty good even if you have multiple mortgages. If you had only 1 mortgage, paid your bills late on a regular basis and had high DTI then you will find that your credit will be pretty low.
Interest rates are not likely to be as low as they were last year and in times past. We have come out of a period of records low rates (40+ year lows actually). Hence you can assume that interest rates for a home mortgage will likely be higher in the future even if you maintain your 800 score. You will not be refinancing to get a higher rate. If you sell you will have to pay what the market is offering.
Lets assume you win the lottery. You do all the normal things with the money including paying off your home mortgage. Why would you care then about interest rates, your credit score, etc? Hence the point of a high score and the prevailing interest rate exists in a specific context. Now lets assume that you are a savvy RE investor, you pick up some great deals, you have a credit score around 680 and you can pay cash for the next home plus live off the cash flow from the rentals. Again it does not matter that your credit score is less than 800 and that mortgage interest rates on offer for you are higher than 6%. You buy the home for cash and save the borrowing costs.
Keep up the good work on the credit front. Do not let the desire to have a lower interest rate or a high score stop you from making serious money. I would rather have the money and not need a mortgage than have great credit because I have not used leverage to build wealth.
John Corey
Chelsea Private Equity, LLC.
PS. It is very much a personal choice. Just be prepared to accept that the right answer might be one that is not about minimizing the interest rate on your home loan. Focus on making an extra $10K a month rather than on reducing the interest costs. With an extra $10K a month you would have the home paid for in about 5 years so a 30 year fixed product would mean you are over paying on the interest rate during the 5 years. A floating interest rate mortgage would actually be the better answer if you do the math.
Re: financing investments without… - Posted by Shawn Dostie
Posted by Shawn Dostie on November 01, 2005 at 16:24:02:
I have close to 1M in debt with the vast majority being mortgages or LOC’s for my car lot. My score has hovered around the 700 range but I still qualify for the best rates my local lender has. My question to you, is the passage of time, the opportunity to lock up whatever income producing investments you are looking up now worth passing up to perhaps save a point on a possible future mortgage? Do it now, and build in the cost of possible interest changes into your commercial investments, and if the higher rates don’t materialize, then you are dollars ahead. Don’t let excuses get in your way.
Re: financing investments without… - Posted by James Harris
Posted by James Harris on November 01, 2005 at 14:05:35:
If your current interest raqte is 6% on your primary, then I would not touch it. One more residence may qualify as a second home and still keep decent rates. Any more than that you’ll be looking at higher rates because it will be considered investment property. However, with score like yours, you will enjoy good rates for some time. I would enjoy the opportunity to work with you. Please advise.
Thanks to everyone for the helpful comments. I think I framed the question a little poorly and John really hit on my main concern - DTI. As I purchase more property and thus have more debt in mortgages, my DTI goes from a favorable number today to something less favorable in the future. That is the root of my concern and what I think I’m hearing is that it shouldn’t be an issue. I’ll use a made-up example to make sure I’m asking the right question:
After buying some more property and mortgaging those:
Gross income: $1000/month.
Total mortgage debt: $900/month.
DTI: 90%
I’m still ok from a cash perspective in this scenario as I have rent paying the better portion of that debt but will a lender look at me and see 90% DTI and that ultimately will affect me? Or can that rent or a portion of it be claimed as income? Hopefully this simple example helps frame my real question.