I live/work in Los Angeles, CA and want to purchase a SFR investment property in the Inland Empire (1-2 miles east of LA). This is my first home purchase and I'm having trouble qualifying for a conventional loan with 20% down, even when I use future rental income to help my DTI ratio. The limiting factor is my current living expense. I currently rent a 3 bedroom house with two other women and we split the total rent. Even though my portion is only $1200/month, loan officers have advised that I will be liable for the entire rent of $3400, pushing my DTI way up. Is there an easy way around this? I've considered 1) using a different lender, 2) asking about DSCR qualification, 3) talking to my landlord to ask if he could write me a separate lease agreement.
Lender · Lewis, CO · Member since 2017 · 218 posts · 159 votes
4y
I assume you are paying your rent from a bank account. If so just document your rent payments for the past 12 months and you'll be able to qualify at your $1200 per month. Guidelines do not require the verification of rent payments through a lease; some people don't have written lease agreements. You should not have to use the $3400. An underwriter might ask for some supporting evidence of your $1200 payment and you should be able to provide that in the form of proof of payment.
It sounds like you should talk about a conventional mortgage with someone else. You shouldn't have to get a DSCR loan and pay a higher rate because people don't know guidelines...
Another option would be to move into the place you're purchasing...
@Daniel Hennek is right about the guideline. I didn't want to get too far into the weeds and that's what a DSCR loan helps you avoid.
To give you a comparison, using a 760 score and a 300K sales price, this morning a conventional rate is close to 5% with a cost of a half point on a 45 day price. Lender's fee is usually around $1000. A comparable DSCR loan would have a rate of 4.75% with a cost of 2 points to the broker (typically, could be higher or lower, but that's what's typical in my world). The lenders and brokers fees will end up being around 2K +/- and there's a prepayment penalty with the DSCR loan (which, if you plan on keeping the property for more than 3 years is a non-issue).
With today's DSCR loans, the rate's a little better than conventional (crazy I know, but it is what it is) but the fees are higher with DSCR. Essentially, you're paying for a significantly easier transaction because no there is no income verification so no DTI requirement. The leases on the new property have to cover the cost of the mortgage. No fuss, no muss.
Lender · Phoenix, AZ · Member since 2021 · 451 posts · 287 votes
4y
I agree with @Stephanie P. DSCR and non-QM products in general will fit your needs. Happy to answer any questions you may have. I use these products for my own personal investment portfolio and my company has an in-house team dedicated to non-QM. I PM'd you my contact info. Best of luck! -Kristen
Lender · Costa Mesa, CA · Member since 2018 · 337 posts · 245 votes
4y
Respectfully, @Daniel Hennek I do know my guidelines! ;) not only that, but i researched this situation to exhaustion across multiple lenders to see their individual interpretations of said guidelines. On one hand, we have to document a present housing expense in order to use the proposed rents on an inv. property purchase. The issue at hand is not simply documenting on-time payments for current housing.
For those who do not have written lease agreements, they would find it challenging to use the proposed rents on a inv. prop purchase because they couldn't evidence a present housing expense. Quite a few of the lenders I spoke with about this scenario will not accept per-room rents as "present housing expense" at all without some contractual obligation. Even a VOR would typically indicate the total amount of rents due on the lease, not that individual's portion of the rents paid ONLY.
While you MIGHT be able to get away with just a VOR or 12 month history of payments from a bank statement, depending on the luck-of-the-draw on underwriter and their interpretation of required documents, you're leaving a lot for gamble and heartache.
Personally, I like to do my purchase PreApprovals in a way that is not left up for chance IF you'll close or not. 100% close ratio doesn't happen by accident :) and the safer bet would be to resolve this hurdle before even shopping for a property. Especially in this market.
Anyway, the end result here wasn't "you don't qualify"; it was "lets see if we can get your landlord to write your lease at your portion only, and we can skip this headache". But i tottttaly love the challenge, especially on guides. Bring it! ;)