Case Study: Qualifying a Married Couple for a Triplex Purchase

Overview

John and Sarah, a married couple, sought to purchase a triplex in the $800,000 to $950,000 range. Their financial situation presented a combination of strengths and challenges, and careful assessment was required to determine their eligibility for a mortgage.

The Couple's Financial Profile

John (Husband):

• Credit Score: Mid-730s

• Income:

  • $80,000/year from a full-time W2 job (started in April 2024)

  • $20,000/year from freelancing before April 2024

  • $35,000/year in unreported rental income (not claimable for lending purposes)

• Debt: A mortgage on a rental property with a monthly payment of $736

• Employment History: Freelanced in the same field prior to obtaining the full-time job

• Current Rent Payment: $1,910/month

Sarah (Wife):

• Credit Score: No credit history

• Income:

  • Earned $100,000/year from 2018 to September 2023 (stopped working to care for their newborn)

  • Began a new job in April 2024, earning $68/hour for 40 hours per week (~$141,440/year)

• Employment History: Stable work history with a gap due to childcare

Key Challenges

1. John’s Income Transition: John transitioned from freelancing to a full-time W2 job in April 2024. Although his new employment provided stability, the recency of this transition meant lenders would focus on his recent job history and income consistency.

2. Sarah’s Employment Gap: Sarah’s employment gap from September 2023 to April 2024 raised concerns, and a Letter of Explanation (LOE) was required. This letter explained that the gap was due to her caregiving responsibilities for their newborn, with a return to stable, high-paying employment thereafter.

3. Credit History: Sarah’s lack of credit history presented a challenge. Building her credit or relying solely on John's strong credit profile became necessary.

4. Debt-to-Income (DTI) Ratio: Their current rent, along with John’s rental mortgage, impacted their DTI ratio, a key factor in qualifying for a mortgage.

Step 1: Assessing the Income

John’s Income

John’s full-time W2 position, which began in April 2024, provided a solid foundation for qualification. Although lenders typically prefer two years of income history, W2 earnings were considered stable. His W2 salary of $80,000/year, verified through recent pay stubs and a letter of employment, translated to $6,666/month. However, the $35,000/year from unreported rental income could not be factored into the qualifying income.

Sarah’s Income

Sarah returned to work in April 2024, earning $68/hour for 40 hours per week, equating to $141,440/year or $11,786/month. While her employment gap raised concerns, the Letter of Explanation (LOE) clarified that the break was due to caring for their child, and her stable employment history helped mitigate potential issues.

Step 2: Calculating the Debt-to-Income (DTI) Ratio

The back-end DTI ratio measures the percentage of monthly income used to pay debts. A DTI ratio exceeding 43-45% often complicates mortgage approval.

Debts:

• John’s mortgage on the rental property: $736/month

• Current rent: $1,910/month

• Estimated triplex mortgage: $5,650/month (based on an $850,000 loan at 7%)

DTI Calculation:

• Combined Monthly Income:

  • John: $6,666/month

  • Sarah: $11,786/month

  • Total: $18,452/month

• Monthly Debts:

  • Current rent: $1,910/month

  • Rental property mortgage: $736/month

  • Estimated triplex mortgage: $5,650/month

  • Total Debts: $8,296/month

The back-end DTI ratio equaled: $8,296 / $18,452 ≈ 45%

Although the DTI ratio was at the upper limit for conventional loans, compensating factors such as John’s high credit score and Sarah’s substantial income helped balance the equation.

Step 3: Exploring Loan Options

Conventional Loan:

John and Sarah’s 45% DTI ratio placed them at the higher end of eligibility for conventional loans. However, their strong credit and steady incomes allowed them to remain competitive candidates, particularly with the potential rental income from the triplex helping to improve their financial standing post-purchase.

FHA Loan:

Given the DTI ratio and Sarah’s limited credit history, an FHA loan became a favorable option. FHA loans allow higher DTI ratios (up to 56.99% in some cases) and offer lower down payment requirements, providing more financial flexibility. This loan option could facilitate easier qualification, especially with the future rental income.

Step 4: Addressing Sarah’s Lack of Credit History

Although Sarah had no established credit, solutions were available to address this issue. John could add her as an authorized user on his credit cards to help quickly build her credit, or Sarah could apply for a secured credit card to establish her own credit history. As the co-borrower, Sarah's lack of credit history played a big role in the couple's ability to get approved and she was added as an authorized user on John's credit card, giving him a boost in credit and Sarah the ability to qualify for the loan as a co-borrower.

Conclusion and Recommendations

John and Sarah’s financial profile, despite some challenges, qualified them for a mortgage on a triplex in the $800,000 to $950,000 range. Their combined incomes and John and Sarah’s strong credit score offset the high DTI. After careful consideration of their options, including the conventional and FHA loan pathways, an FHA loan was selected as the most suitable solution. This loan option accommodated their DTI ratio and allowed for a 3.5% down payment.

A pre-approval letter for a fixed-rate 30-year FHA loan was successfully obtained, setting John and Sarah on the path toward homeownership and positioning them well to invest in a triplex.