How Much Does Buying A House Affect Your Debt Ratio And Credit
Was wondering how much an investment property affects your debt ratio and your credit score? What can I do to help eliminate this?
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Was wondering how much an investment property affects your debt ratio and your credit score? What can I do to help eliminate this?
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This would depend on your income ver. you monthly debt. Depending on how much you owe on the income property that could vary.
You can calculate your debt to equity or debt to value ratios by summing your debts and dividing by the sum of your equities or values.
The question of how an RE purchase by itself effects credit scores is an interesting one. I know mine went up but I don't know that the reason for the increase was strictly due to the purchase.
Most lenders will use 75% of rents from income property towards your dti. So to offset any increase in your dti, you would need to charge rents which is about 133% more than your mortgage payments. Example, if your mortgage payments are $1000/mo, you would need to charge rents of about $1340/mo. $1340 x 75% is about $1000, your dti is offset. Also to include rents towards your dti, most lenders require a 1+yr lease, no month to month.
Is this ONLY the mortgage payment or does it also include Taxes and Insurance and/or other items?
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On 2004-01-09 00:28, geo_choy wrote:
Most lenders will use 75% of rents from income property towards your dti. So to offset any increase in your dti, you would need to charge rents which is about 133% more than your mortgage payments. Example, if your mortgage payments are $1000/mo, you would need to charge rents of about $1340/mo. $1340 x 75% is about $1000, your dti is offset. Also to include rents towards your dti, most lenders require a 1+yr lease, no month to month.
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The above post is exactly correct, but taxes and insurance also must be included in the payment.
As for the effect on the credit score, I haven't seen it really hurt the score, unless of course payments fall behind. The thicker the credit file, the more points earned. Lates or bad items in the last 12 months, and balance/limit ratio over 40% on revolving accounts will both make up over 70% of the score.
good post.
The loan will impact your credit score. For your exact situation, you can try some of the credit score simulators on the the credit reporting bureau websites. As you pay off the loan (on time of course), your score will get better as your debt is paid off. The less debt you have, the higher your score will be. Once your mortgage is paid off, it will reflect very positively on your credit report and make your score probably better than before you had the loan.
The only way an investment property mtg hurts you is the following applies to you:
1) Your piti is higher than the rent
that is the ONLY way an investment property hurts your debt ratio
The only way it hurts your credit is if you DON'T PAY on time
There is some truth in all these posts. Buying real estate will affect your credit score and diminish it over time even if the rents received are high enough to cover all the payments and costs.
I met this weekend with an investor that is a mortgage broker/investor from Salt Lake and has several million in properties and he was questioning me on subject to because of the effect all his properties was having on his credit score and his ability to get more credit even though he is in a strong cash position.
HIs comment to me was "get the deed but keep the mortgage out of your name if possible by using other investors credit etc."
Just a thought...
Randall
That's a good idea. What I don't understand is why would buying several investment houses affect your credit if your rent is 125% of your mortgage?
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On 2004-01-19 23:09, Stockpro99 wrote:
There is some truth in all these posts. Buying real estate will affect your credit score and diminish it over time even if the rents received are high enough to cover all the payments and costs.
I met this weekend with an investor that is a mortgage broker/investor from Salt Lake and has several million in properties and he was questioning me on subject to because of the effect all his properties was having on his credit score and his ability to get more credit even though he is in a strong cash position.
HIs comment to me was "get the deed but keep the mortgage out of your name if possible by using other investors credit etc."
Just a thought...
Randall
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The sheer amount of liens that you have will, at some point, affect your score, even if you have the income to currently make all the payments.
Remember that the credit scores are setup for the lenders benefit. The more debt that you have, the more wary lenders will become to letting you have more. Goes with the old saying, "the bigger they are, they harder they fall."
Most lenders have a cap of 2-5 loans per person. The reason is the same as above. They don't want to lend too much money to any one person, just in case that person goes "belly-up."
Roger
It is usually better to form a corp. or llc to hold your investment properties in.By doing this you will keep your personal and business credit seperate.A good RE Attorney and Accountant can help point you in the right direction.
So I won't get the ding on my credit if I end up LLCing my investments?
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On 2004-01-20 10:51, MichaelChandler wrote:
It is usually better to form a corp. or llc to hold your investment properties in.By doing this you will keep your personal and business credit seperate.A good RE Attorney and Accountant can help point you in the right direction. <IMG SRC="images/forum/smilies/icon_wink.gif">
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I understand that having an LLC be the purchasing entity and your name essential signing for the LLC on the mortgage, the mortgage will not appear on your credit report. That is only way to go, else you will max out in eyes of the banks as you gather more props.
Using a business entity to finance your properties likely won't help you much.
First, a new entity has no credit, so to purchase in the entity's name, you would probably still have to co-sign the loan personally, thus attaching it to your credit. Even if the entity has a credit rating, many lenders still require an officer of the entity (that again would be you) to co-sign loan.
Second, using a business entity to finance means that you'll be using commerical loans instead of residential loans. Commerical loans usually have stricter guidelines, higher interest rates, and much shorter terms (usually 10 years or less).
If you're buying thru institutional financing, getting a high DTI rating is just the nature of the beast. It's going to happen at some point. Creative financing was developed because of this very point. Subto buying and Lease-Options are controlling methods that require no credit (and no hits to your credit). Most private lenders and hard money lenders will not hit your credit. Cash partners, no credit. Even equity lines and lines of credit will only slightly affect the current credit score because the whole line is usually already counted against you whether you've used it or not.
Roger
The number of mortgages does not affect your credit in a derogatory manner as long as they are paid on time. I just refied someone and they have 48 mortgages on the credit reporting to all three bureaus. Plus 10 that did not report and his credit middle score was 798. I have heard people say mortgages affect credit scores, but I've never seen scores drop except for non-payment of mortgage
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Hmm... good to know. Thanks for the post.
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On 2004-01-25 18:33, tinman1755 wrote:
The number of mortgages does not affect your credit in a derogatory manner as long as they are paid on time. I just refied someone and they have 48 mortgages on the credit reporting to all three bureaus. Plus 10 that did not report and his credit middle score was 798. I have heard people say mortgages affect credit scores, but I've never seen scores drop except for non-payment of mortgage
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