Hi,

I'm wondering if my loan guy is right. A couple came to me recently wanting to purchase a new 3/2 house in their approximate vicinity. They have a nice sum of money to put down on a new home ($30,000 inheritance left-overs). She doesn't make much (part time $10,000/year). He makes about $4,300/month with overtime. Maybe $3,900 w/o overtime. They're both in their mid/late fifties. They currently live in a 2/1 condo which they've lived in for about 10 years. They are also upside down on the condo. They owe $145,000 on it but it's worth about $90,000 - $100,000 (they re-fi'd and what not). Since they have this large sum of money, they thought they could use it as a down payment on a home, they wanted to keep the condo but rent it out as an income property and purchase the 3/2 home to live in.

Upon listening to their scenario and doing the numbers, my loan guy said it couldn't be done right now because the bank would look at the condo they currently make payments on ($1,100 w/util's. and assoc. dues) add that to their current debt plus a new house payment of approx. $1,300 - $1,400/month (based on current market home prices/interest rates that would pertain to these clients specifically) vs income and that would put them at about 70% DTI which greatly exceeds the 45% DTI ratio that is allowed by the bank.

Is it not possible for them to purchase given their situation? I have not dealt with this situation before but I thought the condo's income upon rental would be factored into the numbers therefore reducing the DTI. Is that wrong?

I just want to double check with you guys.

P.S. this is in So. California.

Thank you!

If they were smart, they'd buy a home in the wife's name and let the condo go back to the bank.

I think your loan-guy is onto their plans.

Yeah, I'm thinking she wouldn't qualify on her own. I don't think they were going to pull a fast one. They really thought they could rent out the condo and use it as an income property and at the same time, buy a home they could enjoy for the rest of their lives.

In order for rental income to be considered, it kind of has to actually already exist, and even then only 75% (from what I am told) would be applied.

I don't see how anyone that upside down in something and that income would think that they could double their debt. This is the kind of thinking that gets people into really bad financial situations. They've got money burning a hole in their pocket, and instead of using it to pay existing debt, they want to use it to create even more. Do them a favor and make them face up to reality. They might not appreciate it now (or ever) but it's the right thing to do.

Yes rental income can be used and some lenders will count the 75 percent even if new if you have at least a 1 year lease. If it's a cash lease where payments are on the down low then they can't document it.

Banks are real funny right now writing anything that is questionable paper. For one regulators are breathing on them for existing bad loans on the books and also marginal loans are not being sold off on Wall Street so the bank would be stuck with the loan.

You just talked to one mortgage person and need to try others as well.Some properties that are listed as REO's you can get the bank to owner finance a note with enough down. These are not national institutional banks but small to regional banks that have more leeway to deal with defaulted properties.

Super answers guys!

Thank you!