Buying an investment property is an attractive option for many investors looking to build wealth. However, qualifying for an investment property loan requires meeting specific debt-to-income (DTI) ratio requirements. This article will examine how DTI is calculated for investment property loans, minimum DTI requirements, and tips for optimizing your DTI to qualify for the best loan terms. We will also look at down payment requirements, reserves, rental income calculations, and other key factors lenders evaluate when underwriting investment property loans. With the right preparation and financial profile, investors can secure competitive financing to purchase revenue-generating assets and start building their real estate portfolio.
DTI includes all monthly debt obligations
When applying for an investment property loan, lenders will review your total monthly debt obligations to determine if they are within acceptable DTI limits. This includes your proposed PITI (principal, interest, taxes and insurance) payment for the investment property purchase, as well as all your other monthly debts such as auto loans, credit cards, student loans, and existing mortgages. Lenders generally prefer your total DTI to be below 45%, but many will approve loans up to 50% DTI with good credit and sufficient assets.
Minimum DTI requirements for investment loans
While DTI allowances can vary by lender, most have minimum DTI requirements investors must meet to qualify for a mortgage:
– FHA loans require a minimum 31% DTI
– Conventional loans require a minimum 25% DTI
– VA loans don’t specify a minimum DTI, but most lenders like to see at least 23%
– USDA loans require a minimum 29% DTI
Even if you meet the minimum DTI, it’s advisable to get your ratio as low as possible. The lower your DTI, the less risky your loan looks to lenders.
Optimize DTI with larger down payment and reserves
Two ways to lower your DTI for an investment property purchase include:
– Making a larger down payment to reduce the loan amount and PITI payment. Investment property loans typically require a 20-25% down payment.
– Having 6-12 months of PITI reserves for all rental properties owned. These liquid assets provide a buffer to carry the properties if you lose tenants. The more reserves you have, the lower your DTI.
Include reliable rental income in DTI calculation
Having rental income from the investment property can offset the PITI payment and improve your DTI. Lenders generally require rental income to be 75% of the market rent to account for vacancies. They’ll review the appraisal and leases to verify rents. Seasoned investors with a track record of occupancy may be able to use 100% of rents to lower DTI.
Work to improve credit score and reduce other debts
In addition to optimizing down payment and reserves, take steps to improve your credit score above 700 and reduce other monthly debts prior to applying. This will maximize DTI allowances. Pay down credit card balances, pay off car loans and student loans if possible, and avoid taking on new debts when applying for an investment property mortgage.
A lender’s DTI requirements are a key hurdle for securing investment property financing. By understanding how DTI is calculated, the typical guidelines, and ways to optimize your ratio, investors can put themselves in the best position to qualify and get approved for a competitive loan. This allows you to maximize returns and build your real estate investment portfolio. With preparation and a long-term view, investment property ownership can be an achievable goal.