A multi-family home is a type of residence that provides separate living quarters for mutliple families, such as a duplex, triplex or apartment complex. Some find that this is a method for rental income to offset their living expenses, or simply an investment tool. The owner can live in the building and rent out the other units, or live in a separate residence. Regardless, prior to buying a multi-family house, the buyer must look to see if he can afford the property. By using the same tools as a lender would to determine ability to repay the debt, the potential buyer can analyze his decision to determine if he can afford to purchase the property.
One of the biggest indicators that a lender uses to determine eligibility for a new loan is debt-to-income, or DTI. In this ratio, the lender compares the total monthly debt payments of the borrower to his pre-tax income. If the ratio is less than 35 percent, the loan is likely to be approved. If it is more than that, the lender weighs the information heavily in his approval decision. The worry is that the debt-to-income ratio is too high, and so the borrower might not be able to afford the new debt and maintain timely payments. Calculate your DTI by dividing the total amount of your monthly debt payments (including the new mortgage on the multi-family home) into the total amount of your pretax income. The resulting decimal number multiplied by 100 gives you your DTI percentage. Anything more than 40 percent means that a very large portion of your monthly income is going toward debt repayment, which can mean financial trouble if large, unexpected expenses occur.
Can Current Income Cover the Payment?
Lenders will look at your current income, not future projected income, in most cases to determine your ability to repay debt. So, they will look at the property as it is, without rent payments. If you can afford the property only if it is fully rented, it might not be something you can truly afford. For example, say the property sits empty for a month or two -- will that put you in a serious financial bind? Even if the property has a strong rental history, it does not mean your future tenants always will pay on time or that it always will stay rented. If you can afford to pay the mortgage and any associated expenses on the multi-family home without rent payments, you likely can afford to purchase the property.
Time to Pay Off Associated Debt
Another factor to consider in this investment is the amount of time it takes for you to "break even" or begin to make money on the property. If you spend several hundred thousand dollars on the property, how many years of rental payments will it take for you to turn a profit? This is an important indicator of the viability of the investment.
Even if you feel that you can afford the property, if you need to take a mortgage on the property, the lender has the final say on the deal closing. The lender not only will require you to meet his DTI requirements, but you will have to provide income statements, credit history and documentation on any other property owned. Retirement accounts, as well as divorce decrees, might be required in certain situations. Provide your lender with the requested information in a timely manner to quickly close the mortgage loan.
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