Didn't qualify for a loan, how can I still buy my first duplex??

Buying & Selling Real Estate
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Didn't qualify for a loan, how can I still buy my first duplex??

Hunter Wolfe
New to Real Estate · San Francisco, CA · Member since 2017 · 23 posts · 17 votes

Hey BP!

I could use some guidance right now.

I've been working two jobs for the past year; a restaurant job for three years and a commission-based job with a real estate investment team for the past year.

I'm renting right now, but for the past year, I've saved about $25,000 to put me in a strong position to buy my first personal investment property.

Last week, I applied for a mortgage through US Bank, and I just found out I was denied because of my income. While I make apx $32-34k per year from my restaurant job, two-thirds of that come from tips. One third is my base pay. My credit score is 743, and my savings looked good according to the lender, but because of being furloughed for three months (due to Corona), they're not counting any of the tip money I've made over the past two years. (Which I think is dumb, because my unemployment covered base pay and tips completely for three months... But that's besides the point.)

TL;DR: I didn't qualify for a mortgage from US Bank, but I'm determined to still buy a duplex before my current lease expires in April. What are my options? Contract for deed? Getting a co-signer? I'm just not sure what other paths I can take, because all of my research prepared me to buy my first property myself through a lender.

Any suggestions are appreciated!

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Ben Zimmerman
Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes
6y

Keep calling around to different lending institutions.  Just because one bank shot you down doesn't mean another bank won't accept your loan package.  Smaller banks and credit unions tend to be much more flexible with underwriting than the big box banks are.  

Never, ever give up after the first rejection.  Otherwise all of us would still be broke and single.

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  • Sarah Brown
    Real Estate Agent · Nampa, ID · Member since 2017 · 439 posts · 361 votes
    6y

    You could use private money.  Either find a property that the owner is willing to carry on, or partner with someone who is willing to from the cash for you for an expense. 

    2Reply
  • Bradley Laddusaw
    Lender · Oceanside, CA · Member since 2014 · 39 posts · 50 votes
    6y

    I would have to second what @Sarah Brown said.  You can get creative with a combination of private money and a seller carryback.  We have seen more acquisition loans coupled with a seller carry back come across our desks lately.

    Seller carry backs will work best of the seller owns the property free and clear and or carry's a small lien position.

    If you do end up combining private money and a seller carryback, you may want to make sure that your overall debt position will leave enough equity on the table for a refinance down the road.  It may be counterproductive if you end up getting locked into an over leveraged acquisition leaving no room for a refinance.

    2Reply
  • Kris L.
    San Antonio, TX · Member since 2019 · 930 posts · 836 votes
    6y

    @Bradley Laddusaw

    If you can’t qualify for a primary, can you qualify for a refi?

    0Reply
  • Bradley Laddusaw
    Lender · Oceanside, CA · Member since 2014 · 39 posts · 50 votes
    6y

    I run a private lending firm but in speaking to colleagues in the conventional and non qm world, there are a multitude of loan options out their for investment properties.  If someone is looking for a loan on a primary residence, chances are they are not receiving private money financing for that.

    US Bank is just one lender.  Regional banks and credit unions are also a great route to start as they may have more flexibility on their loan options.  All questions should be asked ie: purchase loan vs. refinance, primary vs. investment, etc.  

    In addition to this, the NON QM options have started to make their way back into the space.

    Long and the short is, before someone jumps into an investment, there are many avenues to explore when it comes to financing options.  

    2Reply
  • Hunter Wolfe
    OP
    New to Real Estate · San Francisco, CA · Member since 2017 · 23 posts · 17 votes
    6y
    Originally posted by @Kris L.:

    @Bradley Laddusaw

    If you can’t qualify for a primary, can you qualify for a refi?

    Great question. Probably not, but the goal here is to not pay rent anymore. I'd rather be paying on a mortgage (yay, equity!) for two years until I can qualify for a loan/refinance than pay rent to my current landlord.

    0Reply
  • Hunter Wolfe
    OP
    New to Real Estate · San Francisco, CA · Member since 2017 · 23 posts · 17 votes
    6y
    Originally posted by @Sarah Brown:

    You could use private money.  Either find a property that the owner is willing to carry on, or partner with someone who is willing to from the cash for you for an expense. 

    That's the avenue I'm considering! I have friends who would probably partner with me on a deal. I could front the cash, but they would take out the mortgage, and we'd split cash flow on the property 50/50. Can you think of another way we might structure that?  

    1Reply
  • Hunter Wolfe
    OP
    New to Real Estate · San Francisco, CA · Member since 2017 · 23 posts · 17 votes
    6y
    Originally posted by @Bradley Laddusaw:

    I run a private lending firm but in speaking to colleagues in the conventional and non qm world, there are a multitude of loan options out their for investment properties.  If someone is looking for a loan on a primary residence, chances are they are not receiving private money financing for that.

    US Bank is just one lender.  Regional banks and credit unions are also a great route to start as they may have more flexibility on their loan options.  All questions should be asked ie: purchase loan vs. refinance, primary vs. investment, etc.  

    In addition to this, the NON QM options have started to make their way back into the space.

    Long and the short is, before someone jumps into an investment, there are many avenues to explore when it comes to financing options.  

    Thanks for all of your advice, Bradley.

    I spoke with one local credit union, and they said they didn't offer FHA loans, which was kinda how I wanted to finance my first house hack. (I know they're 3.5% down, but after closing costs and whatnot, I budgeted for 7.5% down.) When they said they didn't offer them, I went to US Bank, but do you think I should reach out to a few other credit unions then? Or maybe you recommend a different financing option? My credit score is 743, I have $25k in savings, for context.
     

    0Reply
  • Bradley Laddusaw
    Lender · Oceanside, CA · Member since 2014 · 39 posts · 50 votes
    6y

    Unfortunately for the first property you are jumping into, you may not be able to get the initial purchase loan with money down combo you were seeking.  Though more loan options are coming to market, they are still a lot more tight from Pre-Covid standards.  

    This platform could be a wealth of knowledge so learning from other's mistakes and successes could be extremely valuable for you.  You may need to come in with more money down and pursue more of a non-qm option.  I would continue the conversations with you current lenders to see where you need to be to get the loan you are seeking.  Just because you do not qualify today, does not mean you wont down the road.  

    At the end of the day it comes down to opportunity cost and making an investment decision on your end. Does it makes sense to pass on a property you plan on holding over the foreseeable future due to not getting the FHA loan or does it make sense to close with an alternative form of financing leaving other exit strategies on the table?

    What do they say? "If it was easy, everyone would do it."  Feel free to message me with any other questions and I would be more than happy to make intros in my network.

    1Reply
  • Hunter Wolfe
    OP
    New to Real Estate · San Francisco, CA · Member since 2017 · 23 posts · 17 votes
    6y
    Originally posted by @Bradley Laddusaw:

    Unfortunately for the first property you are jumping into, you may not be able to get the initial purchase loan with money down combo you were seeking.  Though more loan options are coming to market, they are still a lot more tight from Pre-Covid standards.  

    This platform could be a wealth of knowledge so learning from other's mistakes and successes could be extremely valuable for you.  You may need to come in with more money down and pursue more of a non-qm option.  I would continue the conversations with you current lenders to see where you need to be to get the loan you are seeking.  Just because you do not qualify today, does not mean you wont down the road.  

    At the end of the day it comes down to opportunity cost and making an investment decision on your end. Does it makes sense to pass on a property you plan on holding over the foreseeable future due to not getting the FHA loan or does it make sense to close with an alternative form of financing leaving other exit strategies on the table?

    What do they say? "If it was easy, everyone would do it."  Feel free to message me with any other questions and I would be more than happy to make intros in my network.

    Exactly. It just makes more sense to me to spend the next two years building equity in an investment duplex than paying rent to someone else.

    My new challenge is how to find deals where sellers are interested in seller financing. Is this something buyers normally pitch to sellers who've listed their homes on the MLS? Or will I have more luck in off-market deals?

    0Reply
  • Ben Zimmerman
    Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes
    6y

    Keep calling around to different lending institutions.  Just because one bank shot you down doesn't mean another bank won't accept your loan package.  Smaller banks and credit unions tend to be much more flexible with underwriting than the big box banks are.  

    Never, ever give up after the first rejection.  Otherwise all of us would still be broke and single.

    3Reply
  • Hunter Wolfe
    OP
    New to Real Estate · San Francisco, CA · Member since 2017 · 23 posts · 17 votes
    6y
    Originally posted by @Ben Zimmerman:

    Keep calling around to different lending institutions.  Just because one bank shot you down doesn't mean another bank won't accept your loan package.  Smaller banks and credit unions tend to be much more flexible with underwriting than the big box banks are.  

    Never, ever give up after the first rejection.  Otherwise all of us would still be broke and single.

    Great advice!

    I'm really considering the seller financing option. That, or partnering with a friend on deal/getting a cosigner. I'm realizing I still have lots of options.

    Thanks for the encouragement!

    1Reply
  • Matt Camilliere
    Rental Property Investor · Member since 2018 · 15 posts · 28 votes
    6y

    @Hunter Wolfe Your mind's in the right place starting with a duplex. 

    One thought I'm having is if you can find a duplex that has one occupied unit with a long term tenant and one vacant for you. If you can provide that lease to the bank showing that there will be guaranteed rental income for the upcoming year they may be more flexible. 

    If you have to own this first and have the lease under your own terms to get approval, I'd recommend going the hard money route and finding a value add duplex. Once it appraises for more than what you got it for, you have tenants in there paying $X a month you'll have a strong case to refinance into an owner occupied conventional loan (also be open to conventional - just 5% down).

    Another option is looking for a job with a salary. SDR / BDR jobs at tech companies usually have 40/50k base and are a great launch pad for a high paying career (that does not have to be forever if your exit is real estate). As soon as you can show you have a salary in that range with your 743 credit score you'll probably be approved 250k+. 

    0Reply
  • Jonathan Taylor
    Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
    6y

    @Hunter Wolfe there are a few options for you. I would advise you away from HML as it is expensive and costly for newbies if you miss calculated your numbers. There are a few lenders who allow you purchase a property based on the income projection of the property if you don't live in it. If you are looking to live in the unit, look at home path, home possible, FHA or NACA for owner occupied 1-4s. You can close with less but they will look at your income. Post CV19 is a bit of a moving target but wouldn't hurt to look into as I have not closed a loan with them post Covid.

    Hope that helps

    0Reply
  • Chase Olson
    Property Manager · Florence OR · Member since 2020 · 15 posts · 5 votes
    6y

    Go check out other banks, i got denied by a bank for my first loan as well. so i walked right across the street to their competitor bank and got the exact loan i was looking for. 

    also try to take advantage of USDA home loans and rural housing loans.

    1Reply
  • Account Closed
    Hayward, CA · Member since 2017 · 48 posts · 55 votes
    6y

    I'd go the co-signed route.  My first two properties I had my mom co-sign on the loan.  I put her on the deed as joint tenants during the purchase and, years later, removed her from title once I could qualify without her (through a refi).  She didn't contribute any cash to the property, but there was no way a bank would lend to me being an inexperienced 19 year old with questionable income sources.

    If you have a person who could do this for you it might be all you need to help make a bank have faith in the situation.

    0Reply
  • Jaqueline Sarmiento
    Member since 2020 · 2 posts · 1 vote
    6y

    @Hunter Wolfe I’m totally in the same boat with you! “/

    0Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    6y

    @Hunter Wolfe I like the co-signer route others have mentioned. I would stay away from HML and other non-bank sources of financing for your first deal.

    0Reply
  • Daniel SmythPro Member
    Rental Property Investor · Rockford, IL · Member since 2019 · 471 posts · 342 votes
    6y

    @Hunter Wolfe

    Duplex is good enough collateral is my guess!

    [email protected]
    0Reply
  • Skyler Southern
    Rental Property Investor · Fishers, IN · Member since 2018 · 27 posts · 16 votes
    6y

    @Hunter Wolfe RCN, Lima One and Visio offer products with limited financial information requirements. In exchange, you'll pay a higher interest rate around 7%.

    0Reply
  • Doug Pintarch
    Rental Property Investor · Harrisburg, PA · Member since 2018 · 369 posts · 406 votes
    6y
    Originally posted by @Ben Zimmerman:

    Keep calling around to different lending institutions.  Just because one bank shot you down doesn't mean another bank won't accept your loan package.  Smaller banks and credit unions tend to be much more flexible with underwriting than the big box banks are.  

    Never, ever give up after the first rejection.  Otherwise all of us would still be broke and single.

    THIS.

    If you have literally made one phone call and one application, you haven't even earned the right to think to yourself that you can't get a mortgage.   You need to make phone calls until your elbow hurts.    GO GET YOUR MONEY!

    0Reply
  • Bridget Krause
    Member since 2019 · 20 posts · 17 votes
    6y

    @Hunter Wolfe

    Try a local bank instead of a big bank. Local banks and credit unions are more willing to make exceptions than big banks. Don't give up with trying conventional ways before going to private money, let several banks tell you no before you go to private money. Private money will always be more expensive, you definitely want to lock in lower rates if you can.

    0Reply
  • Ray Evans
    Flipper/Rehabber · Member since 2020 · 57 posts · 36 votes
    6y

    @Hunter Wolfe Your on the right track try a small local bank or credit union.Your credit is good this covid is hopefully temporary.Ry not to put down your entire nest egg.Show them you can make the payments.There are many online mortgage lenders as well.

    Best of Luck

    0Reply
  • Ryan K.
    Pittston, PA · Member since 2017 · 36 posts · 12 votes
    6y

    Hi Hunter,

    I encourage you to stay positive. It's easy to lose heart after getting turned down for financing. The deals will come, with or without the bank. In the meantime, I recommend reading Buy and Sell Real Estate Without Using a Bank. It's from 2009 and has become dated, but it's an excellent read. It might help create some outside the box thinking. If you can network, hustle, and seek out motivated sellers, you'll find that you are able to close some deals without a bank. There's a bright side to everything. In these trying times of COVID, your current financial situation actually is pretty decent compared to a lot of others. 

    Best wishes my friend.



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