How to refi cash out when you are an investor with limited income on paper?

Question

Good day Bigger Pockets family,

Question for my seasoned investors. I left Corp America 2.5 years ago. I now have a portfolio of 11 condo's in Southeast Washington DC, and 2 tenant occupied SFH's in Charlotte. I have about 175k in equity in one of my Charlotte properties that I would like to tap into that via HELOC or cash-out refi. But with showing minimal taxable income over the last 2 years, it's now hard to qualify for any type of traditional bank refinancing. It's a vicious catch 22. Anyone have any remedies for a situation like this, as investors?

Thanks,

Adrian Jones

Stacy Raskin · Answer

DSCR loans are ideal for purchase or refi rental property loans when you don't want to do an income based loan. DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth. Here's a bit more in detail about how rates are calculated for DSCR loans:1. Credit score- the higher the best. 780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affects pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then next credit category is 740-759 and so on.2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs. I've included an example below to help illustrate this.So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.See example below:DSCR < 1Principal + Interest = $1,700Taxes = $350, Insurance = $100, Association Dues = $50Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91Since the DSCR is 0.91, we know the expenses are greater than the income of the property.DSCR >1Principal + Interest = $1,500Taxes = $250, Insurance = $100, Association Dues = $25Total PITIA = $1875 Rent = $2300DSCR = Rent/PITIA = 2300/1875 = 1.23DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further.

Sarah Nouri · Answer

Hi Adrian.

Looks like a DSCR loan might be what you are looking for. This type of loan doesn't require any income to qualify you for a loan. This means no w2's, no tax returns, and no pay stubs. Typically what's looked at is the income of the property and your credit score. There is also a seasoning period before you can refinance. The seasoning period varies from lender to lender. It's a lot easier to qualify with a DSCR loan than a traditional mortgage.

Hope this helps!

David Pearl · Answer

@Adrian Jones - DSCR loans are designed exactly for this reason! We require any income verification. So no tax returns, DTI, etc. We also lend to an LLC you form, so it does show up on credit. Very popular for investors in your situation. Happy to discuss.

Alex Hunt · Answer

Yes DSCR refinance. 2nd position home equity loan(on rentals) if your 1st position rate is very low. Based on the income of the property no your personal income. Happy to connect on this, send a message!

Brittany Minocchi · Answer

Hey Adrian -

There aren't many options out there for investment HELOCs, and the ones that are available will be full doc...meaning income, employment and DTI are used to qualify you. It sounds like your best options are either a DSCR cash out refi, or a HELOAN. HELOANs are very similar to a cash out refi in how they're structured, but they do not affect your existing mortgage. A cash out refi would replace your current mortgage (and its rate) with a new one. Both a cash out refi and a HELOAN have options to qualify you based on FICO and the income from the property - your income, employment and DTI are not factors in this case. Biggest downside is that they have a prepayment penalty, so that's something you'll want to consider if you think you might want to refinance in the next couple of years. 3-5 year penalties are common, but you can choose to buy it down to a shorter period of time if you'd like. The longer the penalty, the lower your rate. Interest rates on the DSCR cash out arent that far off from conventional financing right now, but the HELOAN rates will be a good bit higher. Hope that helps! If you have any questions or need anything, please feel free to reach out.

AJ Exner · Answer

Agree with @Devin Peterson on this one, you are absolutely describing a DSCR loan.

The additional advantage to a DSCR loan is that they do not impact your DTI and  you can keep them inside of an entity to help provide an additional layer of liability coverage if you would like

Entities would also allow you to be flexible in your ownership structure, if you need to add someone like a credit partner to help get better terms.

Just shot you a DM, would love to see how we can help.

How to refi cash out when you are an investor with limited income on paper?

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