The 2nd property is the hardest

22 Replies

Perhaps a savvy finance expert can help me figure this out. My wife and I have an fha loan on a house we bought two years ago today. We want to rent it out and buy another as a primary residence. We can't get a second FHA loan, and because of my student loans, my DTI is too high. I thought about hard money, but they seem to be contingent on proof that I have done a rehab before, which I haven't. Any ideas?

Create a 'change in venue', by that I mean, look for Commercial Loans where your credit and DTI are not the criteria for granting the load. CL uses the ability of generated income from the property to cover the debt, using a thing called the DSCR.

With MFUs 2-4, the loan can go conventional or commercial, but if you pick a MFU 5+ it must be a CL, ARM loan.

Chris M.
They are deferred until May 2017 because I'm a grad student. But my lender told me that the rule has changed and the deferment no longer prevents me from being hit with the debt.
J Beard
I need to stick with SFR because my current house is quite nice and I couldn't downgrade my wife's lifestyle by house hacking. (I need to live in the next property so I don't have to pay 20% down)

Right, sorry, I misread.

So I was fortunate enough not to have any student loan debt, and I've never really had anyone motivated/intelligent/resourceful enough to actually drill down on this question in regards to their student loan debt:

Can you take your student loan debt out of deferment, and then put it back in, when you please, and if so how?

The basic idea being to calculate your DTI ahead of time to make sure it'll work, take it out of deferment, close on the mortgage, and put that student loan debt right back into deferment.

(Or voluntarily just take it out of deferment and leave it there, so we can avoid Fannie's stupid way of calculating deferred student loan debt...)

I could call them and ask them to take it out of deferment, but whether or not it is in deferment has no bearing on my DTI. In other words, if the loan considers DTI, I won't be approved. And as I understand it, all conventional lenders do.

There a few ways to lower your DTI ratio. One of the easiest ways is to make more income, but it sounds like you have full plate with grad school. Another easy way to lower your DTI is to move out of your primary and rent it out, while you rent another home. Rent that YOU pay does not count against your DTI. You could rent a pent house sweet for 10k a month and it doesn't count against your DTI. The only problem is MOST banks want at least 1 year of rental income on your taxes before they will count it and remove/counter that mortgage payment on your primary home. I did find one that will simply use a lease to count new rental properties income, but they consider me as being an experienced land lord because a have few years of rental income on my taxes. Moving out of your primary now would give you some experience renting a home as well. I would check with my accountant and get second opinions though.

On a side note, have you ran the numbers on your current residence to see if it would be a good rental? I have a lot friends who have tried to rent their primary homes out and have lost a lot of money, because the house doesn't cash flow.  Renting a home that doesn't cash flow is a good way to go broke. Run the numbers on the BP rental calculator and make sure to input realistic numbers for maintenance costs, capital expenditures, taxes, property management, insurance, and finally the mortgage. 

@John Suralik
Yes it would definitely cash flow well. We paid extra on our principal so our mortgage payment would be lower. Our mortgage payment is $1500 but the minimum this house would rent for is $1800, but probably closer to $2000 because it is nicer than many of the comps. The taxes are a portion of that $1500. I haven't run it through the calculator though. I just hate to waste time renting when all that money could be going toward my own equity.

Originally posted by @Account Closed :

I could call them and ask them to take it out of deferment, but whether or not it is in deferment has no bearing on my DTI. In other words, if the loan considers DTI, I won't be approved. And as I understand it, all conventional lenders do.

 Here's what I think I haven't communicated explicitly:

  • If the student loan debt is in a fully amortized payment plan (eg, not deferred) then we can use your actual real-life monthly payment as the monthly debt obligation. If the payment is $150, we calculate it at $150.
  • If the student loan debt is deferred or in forbearance, we have to use a completely idiotic calculation that will instantly nuke your DTI basically no matter what. It's so dumb that I'm not even going to tell you what the math is.

Does that make sense, and my previous comments, now that I've clarified that?

Chris M.
Ah, yes that makes sense. Yeah my lender told me he had to calculate it as a payment of 1% of the loan balance monthly. That's an awesome idea, let me ask my lender on Monday. Thanks!

Originally posted by @Account Closed :

Chris M.
They are deferred until May 2017 because I'm a grad student. But my lender told me that the rule has changed and the deferment no longer prevents me from being hit with the debt.
J Beard
I need to stick with SFR because my current house is quite nice and I couldn't downgrade my wife's lifestyle by house hacking. (I need to live in the next property so I don't have to pay 20% down)

The part I bolded above is actually more than likely your biggest problem. A romantic partner who isn't a financial partner is the biggest detriment to doing anything. While the best way to improve a DTI ratio is to get more income, the second best way is to pay down the debt. But you can't do it if both partners aren't working towards the same goal.

A partner who isn't willing to downgrade lifestyle in order to achieve mutual goals (ie, cut expenses so more money can go towards debt) is really just a monthly bill that keeps you warm at night.

Either you guys are going in the same direction or you're going apart.  You can't achieve your goals without her help.

I totally agree, and honestly she would certainly agree to do it if I asked. But I know that she would be quietly miserable about it and I want her to be happy. It's really a restriction I placed on myself more than anything. She is the whole reason I'm doing all this in the first place, and if it makes her unhappy then it defeats the point for me.

Do you have any car payments that are adding to your DTI? Paying that off may help. Also, with all properties in this area increasing significantly, you could refinance and get additional cash for your 2nd home from the refi. If you put your house on rent and can show the house leased, that would count towards income. If you can make that happen quickly enough (you may be able to with high rental activity), you could get qualified for a low downpayment loan for your 2nd house.

I could refi and get plenty of cash out, and my house would rent very easily. My lender told me he needed two years of rental history before he could deduct the current mortgage from my DTI. Because of that, I am going to see if another lender has a different take on it.

Do you have any car payments that are adding to your DTI? Paying that off may help. Also, with all properties in this area increasing significantly, you could refinance and get additional cash for your 2nd home from the refi. If you put your house on rent and can show the house leased, that would count towards income. If you can make that happen quickly enough (you may be able to with high rental activity), you could get qualified for a low downpayment loan for your 2nd house.

@Boyd Dixon I have student loans as well but found that you can lower the payments based on your income even if they are deferment so that the payment amount shows more accurately on your credit report.

Chris M. , my loans are in forbearance and we are looking to buy our first four plex with an FHA loan. Do you suggest taking it out of forbearance so that the DTI is lower? I haven't consolidated them and I suppose the other option is to take them out of forbearance to consolidate. Have them take the DTI and then request another forbearance. Suggestions?

As I understand it, the whole thing is easier to do with a 5% down conventional loan. @melissa do you mean that I should contact my student loan provider and do that? Or can the lender do that?