My wife and I are in the process of purchasing our first investment property! I feel like we have hit a roadblock. We are currently going through the pre-approval process with a local credit union. The bank does offer mortgage loans for investment purpose (Higher Interest rate) Since I am the one who has the not so good credit, my wife is using her information to apply for a mortgage loan.
We have already been through the process of going through a mortgage lender to get a fannie mae homepath loan but was told my wife debt to icome ratio was 2 percentage poits over the required limit.
The only liabilities she has is student loan and car payment which are fixed. The next biggest expense the bank takes into consideration is our $1170 rent.
So before we continue with the pre-approval process with the local credit union we want to make sure there are potential other avenues we should consider, especially since we think the bank will tell us the same story of her debt to income ratio being above the required limit.
I have heard of peer to peer lending and hard money lenders which could be a viable options. I would like to get some advice from people who have went through this process before.
My wife and I are only looking into the price range of up to $50,000 max for our 1st investment property. Our Net income is above the median national average, so we know we can afford it "together" its just she has to go on the application alone. So its only looking at her gross income and not mine.
Any thoughts or advice?
Have you tried a local portfolio lender? Their underwriting requirements are much more flexible than the bigger banks.
Best scenario would be to pay off the car. Or, depending on how long she's been paying on the car it may be possible to refinance the car loan so the payment is lower. That may (or may not) be enough to make a difference, you'd have to do the math to see.
If you don't have enough liquid cash to pay off the car you might want to wait on the investment property until you have more cash stashed away. A lower priced property will almost always come with some expensive "surprises". You don't want to get caught out with a house that needs repairs to be rented and no funds to do the repairs...
Are you rehabbing and flipping the proper or buy and hold?
No, my wife and I have not looked into local portfolio lender. Honestly I am not familiar. May I ask whats the difference?
My wife and I are allabout buying and holding...No flipping for us...
The car loan is new just got it almost 2 years ago..Even if we paid the car down her montly payments stay the same..Never thought about refinancing though...We have looked into changing the her car loan into my name , but the bank will use my credit score to determine the monthly payments if we go that direction...
If you have the cash, my suggestion would be to pay off the car loan. Then, instead if making the car payments, pay yourself the same amount into your own savings account and pretty soon you'll be back to having a down payment for an investment property.
@Jean Bolger is correct - you need some liquid cash for rental property emergencies. Get rid of your bad debt first (car loan), then buy a rental. Better to do it slow and be successful than to rush into it and end up stretched too thin and putting yourself into default if an emergency hits.
You can always wholesale a house or two to save more cash though or get your RE license and sell a few houses while learning - no risk that way! :D good luck
@Jermaine HILL Portfolio lending is more of a business loan, they will allow you to use it to buy multiple properties, but not sure how the debt to income ratio will work. As for the car, although the payment does matter, what matters more is the amount you owe. Just like credit cards, if you are over the 50% mark on the credit cards they will consider that a high debt to income. Also with you being a renter yourself, it doesn't help, because you have no collateral. Have you thought of purchasing a duplex? Or multi-family. Something you can live in as well as rent out?
Honestly if I were you, I would try to find a cheaper place to rent(if possible) and really focus on getting your personal debt paid off and work on getting your credit score in place. Also I would work diligently on getting an emergency fund together before you get into buying investment properties. Trust me, it will just help in the long run. Dave Ramsey's Total Money Makeover is a great book and will help you with that direction.
I know its frustrating and something you might not want to hear, trust me I know I've been through it, but it is worth it in the end. Because the last thing you want to do is buy a rental property and then not have the money to take care of it if something happens.
Hattie is correct in that you might want to look for a portfolio lender. You said the bank's issue was your wife's debt to Income ratio was too high, but not by much. Banks that intend to sell your loan on the secondary market (think Fannie Mae, etc) have to follow strict guidelines for them to sell the note, which most do. However, most banks also have portfolio loan programs, especially smaller community banks and credit unions too. A portfolio loan is simply a loan the lender makes in house using deposits that they don't intend to sell on the secondary market. Because of that, they can be more flexible and do a higher debt to Income ratio as well as other things.
As far as getting your debt to Income ratio down, I have to disagree with the earlier post. It does not matter what your debt is as it pertains to the car or credit cards and such. In fact we don't even use debt to figure out that ratio. A debt to Income ratio is your monthly payments on the debt divided by your gross income. So refinancing the car, or other debts to lower payments would lower your ratio. If you are only 2 points over for the conventional loan this might be an option for you. Otherwise call around and ask lenders if they have portfolio products that allow for higher debt to Income ratios. There are a lot of them local to you I am sure. Some will even use her credit to qualify you if she is the primary wage earner but still count your income as a co-borrower.
Hope that helps.
If you're going to be an investor, you have to think like an investor. First and foremost, you have to find a deal that works form an investment viewpoint. If the deal makes sense, then your personal income, credit score and debt to income ratio really don't matter. Structure your deal using OPM (other people's money). Here is how my company structure buy and hold deals:
1st mortgage 65% LTV using a private money (not hard money) loan at 8.5% on a 30-year fixed amortized loan.
2nd mortgage 35% LTV using a hard money loan at 10% interest-only HELOC along with a percentage of the monthly net income (as well as an Assignment of Rents rider if you default on the loan).
You come in with the property under a purchase contract and the cash to cover upfront loan points (1% on the first and 4% on the 2nd), closing costs, and reserves (assumes no rehab costs or they are rolled in to the purchase price and the LTVs are based on After Repair Value rather than purchase price). Based on a $50K purchase, you will need to come in with around $7K in cash and be able to collect at least $800/month after you vacancy rate. You will earn an ROI of about 13.5% for the first year after depreciation and taxes.
This is highly leveraged and is risky for a buy and hold investment. To lower your risk, you lower your leverage. Instead of 100% financing, if you only did 65% financed, your cash required would be a little of $22,000 and your ROI would be about 9% for the first year.
Hope this helps put things into perspective. God Bless You!
@Jermaine HILL Portfolio Lenders, for the purpose of this discussion are generally smaller, local banks and credit unions. They make loans and keep those loans on their own portfolio to service.
Larger banks, because of the volume of loans they are originating and their need to stay below their lending limits, grade loans, package them by grade, and sell the packages to institutional investors or even other lenders. Because of this process and the fact that higher graded loans are worth more, they maintain very stringent underwriting guidelines.
Smaller, local lenders who have no intention of selling your loan can be much more flexible with their underwriting criteria. They evaluate risk and don't have to worry about "grading" a loan. The process becomes much more relational.
There is a type of loan/lending that is portfolio based. However, that is to finance your portfolio. That isn't what I'm talking about. I'm referencing the bank's portfolio.
Update: My wife and I would like to think everyone for their response to my original post! We have carefully read each post and did more research while taking a closer look at our finance and have decided to wait at least 1 year.
We are going to agressively focus on paying off both car loans. This will take around 7.2 months and all save as much as possible. We then feel we will have enough money saved to venture into buying an investment property or buying a primary residence, pull out the equity right away and invest in an investment property.
Going this right gives us more financial stability, better leverage and more options.
ONCE AGAIN THANK YOU ALL!!!
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