Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
I currently hold two rental properties. One is in the final stages of being rehabbed and the other is done, waiting to be filled by a tenant.
I just applied for a refinance mortgage for the two properties and was denied due to having insufficient income to support the loan.
Personal income is ~$40k/yr
Rental income on these two will be $1675/mo
A good deal of cash reserves
FICO ~640
ARV of both properties is ~$160k , looking for $100k in refinance (62.5% LTV).
I'm waiting on the 'official' denial letter but did get a call from the branch manager stating that I was denied. I'll be looking at what all is on my credit report and if there's some loan/property in my name I'm not aware about, as I should have very, very little tied to my name in terms of monthly expenses/loans.
Hudson, WI · Member since 2012 · 189 posts · 30 votes
12y
Potential problems
1- History - you should have shown other 2 rentals, and cash flow.
2- Debt to income - You should have a lease in place on the finished property. With this lease in hand, your bank would possibly consider that potential income, against the potential debt they are trying to qualify you for.
3- 6 months seasoning - doesnt matter if you bought it cash, if under 1 year, they will only use the purchase price, plus receipts for their valuation.
4- FICO score. Get it over 700 and your Debt to income and LTV requirements will be adjusted in your favor by quite a bit.
Example - I currently am not over a 700 and was only able to get 80% LTV, instead of 85% LTV (a difference of around $8,000 on my property)
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
12y
if you do not have 2 years of landlording experience the bank will probably not count your rental income as income. You have no rental income currently to show the bank that your estimated income is accurate. Your credit score at 640 is low to be approved for even a personal residence much less 2 rental properties that are currently vacant at this time. You stated that you have adequate reserves, in cash I assume. It usually makes things go smoother if you bank with the instituation in which you are appling for the mortgages. The bank could also assume that yiu have a lot of those reserves that will be going out in payments to contractors or for materials on the projects that you are just completing.
These are just my observations from where the bank may be coming from. I have found it a good idea to sit down with a lending specialist at the local branch that does the most investment properties and ask what you can do to be the most attractive applicant.
You're probably running into the issue of debt to income ratio. Do you have a primary residence with a mortgage? Car payment? Those things, plus the expected debt payment from the rental properties, will be counted against you, but many banks won't give you any credit for the rental income until you've been able to show it for 2 years, and then I've heard they'll only credit you 70% of that income. So, to them, you appear to have too much debt for the income they are counting.
At least that's my guess, but I'd ask the branch manager to give their specific explanation.
You may be able to find smaller, community banks that would be a bit more flexible and keep the loan in their own portfolio.
Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
12y
Right now i have nearly 7 years of rental experience. Hopefully that isn't being held against me :D
I don't know if it's debt-to-income or something else that's disqualifying me. I am completely unsure of what they are counting. I currently own two other rental properties and did not include their income or expenses on the application for these properties. Maybe that was something I should have done.
I went with a small community bank from the gate in hopes of avoiding problems.
Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes
12y
Yes, you'd think they would have. I didn't know you'd purchased with cash. With a cash purchase, you can do a cash out refi within six months, but there are some caveats. See the Delayed Financing Exception section to see if any apply to your situation that would lead to a denial:
Hudson, WI · Member since 2012 · 189 posts · 30 votes
12y
Potential problems
1- History - you should have shown other 2 rentals, and cash flow.
2- Debt to income - You should have a lease in place on the finished property. With this lease in hand, your bank would possibly consider that potential income, against the potential debt they are trying to qualify you for.
3- 6 months seasoning - doesnt matter if you bought it cash, if under 1 year, they will only use the purchase price, plus receipts for their valuation.
4- FICO score. Get it over 700 and your Debt to income and LTV requirements will be adjusted in your favor by quite a bit.
Example - I currently am not over a 700 and was only able to get 80% LTV, instead of 85% LTV (a difference of around $8,000 on my property)
Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
12y
I guess that could come into play, however this specific lender is a portfolio lender who keeps all loans in-house. That adds more to my concern of their denial.
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
12y
I always provide detailed list of my holdings. I give them:
Property location
My estimate of value
Current mortgages or loans agains property
Terms of any financing
Rental income
Taxes, insurance, and any landlord expenses like water bill for example
Vacancy on that specific property since pit in service
Date of purchase
These things will show them my cashflow and net worth. I did not include repairs expenses or vacancy expenses or capital expenses but they will utilize there own formula for that and I state that. You would also want to show any other significant assets such as "x" amount in so and so IRA and "x" amount in savings at so and so credit union. Then finally list any other debts you may have. I usually bring this information right away or provide it within 24 hours of initial meeting. You become a lot easier to work with when you have been through this before and they see you can provide what they need right away.
As for the seasoning. I recently did a cash purchase and remodeled the home.I attempted to sell for 2 months and then switched to keep it as a rental. I had it financed at 70% LTV which equated to an amount greater than all my expenses into the house including purchase price, fees, and rehab. This was done within 3.5 months of purchase but was a commercial mortgage as well.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
This looks simple to me. Your 640 credit score is, as far as getting an investment mortgage, horrible. Focus on improving that.
The debt coverage on this one seems ok. You day you have seven years landlording. Does that mean rental income on seven tax returns? Are those net positive rentals? If so they should help your dti. But it they show losses then you other income has to cover both your other debt and the loss on costing rentals.
Real Estate Broker · Orange, CA · Member since 2008 · 380 posts · 87 votes
12y
Although a smaller bank and "portfolio" many still follow Fannie/Freddie guidelines this way if needed the can sell loans to raise cash. With that said here's the scoop.
1) 620 Mimumum FICO for investment properties any credit issues must be resolved. (collections paid, etc)
2) You're properties are not lease yet so the PITI is counting 100% against you just like a car or credit card payment. When you do rent these properties the underwriter will want evidence of the tenants deposit so keep a copy of the tenants deposit check and a paper trail into your bank account and a copy of the signed lease agreement. The formula for calculating net rents for properties that are not yet on your tax returns is 75% of the rent minus PITI.
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
12y
Here are some of the questions I would ask
1) How did you not report owning two properties? They would have had to show up on either your personal or business tax return. I doubt the bank would have disqualified you for not reporting.
However, if you count those two plus these two plus I'm assuming you have a primary residence, that would put you over the limit for most conventional loans. You would need to find a lender that does the 5-10 loan types.
As an aside, you really need report all your properties when you fill out the app. They're going to find out anyway - unless you own them free and clear AND you aren't reporting any income/losses on your tax returns from them.
2) Your credit score does seem low. As an investor, your credit score is one of your biggest assets. I would second the comment earlier that you should work hard on getting that up. Most banks don't really want to touch investment property loans as it is. But when they have an easy out just on the credit score (640 means you have some late payments or collections on there), they're going to take it 9 times out of 10.
3) DTI might be the issue too but no way of telling without knowing what your primary residence mortgage payments look like or car loans or credit cards, etc.
4) Good LTV. Here's about the best advice I can give.....
What you do have going for is a pretty solid LTV on the homes you're looking to get loans for. You really only have one option for cash out refi given that you own 4 rental properties total (and I'm assuming you have a primary residence as well). Conventional loans are no longer an option for you as a cash out refi. 5-10 loan programs only allow you to do rate/term refi's as far as I know.
To me, your best option is to go to a local lender and get a portfolio/commercial loan for the property. Don't bother with their residential loan officers. You need to go to the commercial dept and tell them you want a commercial loan on the property as its an investment property. Not all local banks will do these types of loans. You just need to ask around. The large ones (bofa, citi, etc) don't do them at all.
But with your history and your significant reserves (given you paid cash for two homes), I would think you could get a local bank or credit union to do a portfolio loan for you. These loans are a lot more work to get/find than a conventional one. But they might have a little more flexibility on your credit score and your DTI give your LTV's on the homes you're trying to refi.
Good luck. And the two other pieces of advice I would recommend to everybody: 1) ALWAYS report all the homes you own and 2) ALWAYS do whatever you have to maintain a good credit score - that score is a bigger asset than any amount of reserves you will ever have. (well, almost)..... :-)
Lender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
12y
@Brandon Schlichter You've received a lot of good suggestions here. One more to add. Just because one said no, doesn't rule it out. There are several investor friendly lenders in our area. Once the specific reason is known, it can be addressed, potentially with another lender.
Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
12y
The letter the bank gave me was a bit vague - "Too low of credit score, too low of income".
I think i'll talk to another bank or two and see what they can offer me, providing a more comprehensive amount of information to them as well.
We're now solidly cashflowing. Reserves in the bank haven't changed too much, I talked to a few hard money type guys and they were willing to take it on around my wanted LTV, however their rates were too high. I'm not exactly willing to spend 8%-9% on a mortgage when a commercial one that *should* work will be only 4% or so. I'd wish the smaller local banks would just budge at a higher rate than their currently offered rates.
Specialist · San Francisco, CA · Member since 2013 · 227 posts · 158 votes
12y
Yeah I had the same problem a few years ago when my credit took a big hit. Work full time on getting your credit score up. There are some really good things you can do to get it up quickly. I would focus on that more than anything.
SFR Investor · Dallas, TX · Member since 2011 · 604 posts · 243 votes
12y
Your not going to get 4% on a commercial loan, maybe around 6% if your really lucky.
What the bank told you was your credit score was too low and your DTI was too high,,,now that the properties are leased you can make a big change in your calculated DTI, but that score is going to hurt you.
Talk to a good mortgage broker, they can usually help you figure out what you need to do to your credit, or refer you to a professional they know.
I study credit, I know how important it is to my investing and recommend investors learn more about credit. Know what you should be working on long term to get your score up, if your going conventional financing and you have over 4 mortgaged properties you will have to have a 720 mid score.
Whatever you do don't go and 'forget' a property going conforming,,they will find it,,ask me how I know (LOL).
Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
12y
The quoted rates I got were : 4.1% as a 3/1 arm amoritized as a 20 year mortgage and a 15 year fixed mortgage at 5.2%, both commercial loans to a LLC.
Since last month my score went from 638 to 657 this month. Hopefully i can get it up a little more. If I could just get it up another 50-60 points it might get me in a better territory.
At any rate I've managed to find a few people who are willing to give me some smaller loans at the rates I want, but not the ~$100k or so that I want. Another option I've thought is just trying to loan the smaller property out, if my DTI can handle it.