An easy way to calculate your real-estate borrowing power

Expand Your Real-Estate Wealth Faster Using the Simple Debt-To-Income Calculation

Banks love to lend; it’s how they make money. Knowing how to calculate your debt-to-income (DTI) can help prevent an overuse of debt, insolvency (the inability to repay), and exclusion from certain types of borrowing (e.g., mortgages).

My name is Bryan Kreitz, and I’m an expert at helping income earners and wealth generators maximize their real estate investments. And if you’re not sure how borrowing to purchase or refinance real estate works, I can help with that too!

The problem stems from the fact that consumer credit lenders don’t lend with the level of scrutiny that mortgage lenders use to qualify borrowers.

Stung by Access to Easy Credit

Recently, a borrower asked me to help them refinance a piece of real estate so they could pay down their outstanding credit card debt. They had a collection of credit cards, many of which were maxed out, that needed attention.

Looking at their credit history, I could see a pattern of using credit to support their lifestyle and maintain their business. They were able to continuously open new accounts and extend their debt obligations because they were actually “good” debtors.

Their credit history showed no late payments or derogatory items. However, over time, their credit score has deteriorated because of the amount of high credit balances they’ve carried. Because consumer lenders seem to disregard your current debt obligations compared to your annual income, this can lead to big challenges when borrowing to purchase or refinance real estate. Let’s take a closer look…

It Gets Worse From Here

Eventually, the borrowers realized that there were no longer viable options to open new credit accounts, so they decided to leverage the equity in their real-estate portfolio.

Unfortunately, their score had receded to the degree they couldn’t borrow enough against their owned real estate to pay off the credit card debt. In fact, at their current score, they were unable to access an additional 5-15% equity in their real estate portfolio, simply because they had too much outstanding debt.

Now they may be forced to liquidate an automobile and face the consequences of the financial logic used in the past. I call this “debt religion,” and I want to help ensure your path to prosperity doesn’t get derailed or stuck temporarily in the same situation.

The Easy Formula for Staying in the Sweet Spot for Borrowing

Imagine using a simple calculation to quickly calculate your borrowing power or determine if you’re too overleveraged to purchase real estate.

If you’re not familiar with your debt-to-income ratio (DTI), I will show you how to easily calculate your ability to repay a real-estate loan/mortgage. It’s also a super simple way to measure your liquidity and ability to purchase real estate.

Here’s how the calculator works:

1. First, add up all your monthly housing, debt, and legal obligations (e.g., alimony, child support, and HOA fees). For credit cards/revolving credit lines, simply use your minimum monthly payments
2. Next, divide the total amount by .45 to get the monthly salary you’d need to be solvent enough to purchase real estate. Optionally, multiply your needed monthly salary by 12 to get an annual salary/income necessary
3. For example, let’s say your monthly debt and housing obligations are $3,800. That would mean your monthly income would need to be $8,444.44 (3800/.45) or your annual gross income of $101,333.33

Measuring the Quality of Your DTI

Measuring the quality of your debt-to-income (DTI) ratio is simple. If your ratio is less than .43 – .45, you’re in good shape to borrow IF that amount includes your current mortgage/rental costs.

Anything over 45% begins to increase your costs to borrow and negatively impacts your real-estate borrowing power.

For all intents and purposes, anything over 50% is a no-go for getting a home loan/mortgage.

Using DTI to Create a Real-Estate Borrowing Plan

Think of a 45% DTI as the most you want to leverage, and you’ll be in good shape when it comes time to purchase real estate.

This can also be super helpful if you’re renting and want to use your current DTI to gain insights into just how much you can afford for a monthly mortgage payment.

Just remember, if that number doesn’t include any housing costs, you’ll need to focus heavily on eliminating a sizable portion of your debt obligations (e.g., 10-15% depending on where you live) before applying for a mortgage.

Moving Forward with a High DTI

In the case of our borrower, they now have a plan to get on track with their financial obligations and protect a real estate portfolio they’ve worked so hard to build.

If you’re in a similar situation, this may be a good time to talk to a mortgage professional, and look for ways to either decrease your debt obligations or increase your income.

With this simple formula, now you too can gauge your real-estate borrowing power and calculate how much you are leveraging your income.

Just remember, consumer lenders care little about your ability to purchase real estate, so watch out for any offer that tempts you to extend beyond a 45% DTI. You just never know when the perfect real estate opportunity will show up in your life.

Till next time, go forth and prosper.

Best regards,

Bryan