How to finance a property with maxed out DTI

[Sam Wilson]

Hello everyone, first of all I want to thank you for taking the time to read my post and hopefully give me some advice. I am a newer investor in the Portland area and I need advice on how to move forward with financing my next deal. To get a clear picture of the situation here are my current investments and funds available. 

Property 1: $1,900 - rent / no debt / value 420k+ / Cannot sell

Property 2: $2,800 - rent / PMI - $1,857 / 300k mortgage 2.5% / 590k+ value / Leased month to month

Property 3: $3,700 - rent / PMI - $3,162 / Primary, $450k mortgage 5.3875% / 650k+ value / House hack room by room rental

W-2 income is 6k per month

75k cash

I have identified a property in Wyoming (family there/boots on the ground) for 150k and a rehab of 65k. ARV is north of 240k. Ideally I would be able to buy and renovate this property as well as have funds to buy another primary home to live in and house hack by the end of the year. I'm unsure how to get past the DTI barrier.

How would you structure the recourses to not only do an out of state flip but also be able to move into a 500k plus primary home to house hack in my home state?

I greatly appreciate your time and here's to the best real estate community out there!

[Robin Simon]

Check out DSCR Loans

Comprehensive guides here:

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Multifamily DSCR Loans: A New High-Impact Loan Option For Real Estate Investors?

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[Sam Wilson]

Hey Dennis, I really appreciate the thought you gave in the reply. I have been considering a DSCR loan on the first property and I figure I could get around 260k equity out of it. My main concern is that I am aiming to move out of the home I am in and purchase another primary using conventional financing at the end of the year. Is there a way to get the DSCR loan and not have it negatively affect my DTI when I apply for the next primary or am I stuck in a position where it would be one or the other? I've been talking to lenders and it I haven't been able to get a definitive answer on if they will lend without counting the DSCR loan on my personal DTI.

[Timothy Hero]

Going DSCR limits all your concerns, but will decrease your cash flow. However, most investors reach a point where decreasing cash flow to accumulate more properties is the scaling process. You may be there.

Right now, the hottest lenders in the DSCR game are 7-7.25% for max LTV.

As for DSCR with DTI, DSCR loans aren't reported on credit, so unless you mention it to the bank, they won't know it exist.

[Dave Skow]

@Sam Wilson- 1) meet with a lender and begin the pre approval  process  - the  way rental income is  determined  by lenders  is  different   2) try buying the WY  rental with  15%  down  and using the rental income  for this to help  offset the new payment 

[Sam Wilson]

@Timothy Hero Thank you for the advice. I'm definitely looking to scale and have started to look at how to maximize the equity vs the cashflow. For the DSCR loan. If it isn't reported on credit and the bank doesn't know about it, could I use the income on that to subsidize my personal DTI or would I have to leave that out of the equation too?

@Dave Skow I'm starting the process of looking for lenders today. Thank you for the great advice. I'll see what I can come up with!

[Dave Skow]

Quote from @Sam Wilson:

@Timothy Hero Thank you for the advice. I'm definitely looking to scale and have started to look at how to maximize the equity vs the cashflow. For the DSCR loan. If it isn't reported on credit and the bank doesn't know about it, could I use the income on that to subsidize my personal DTI or would I have to leave that out of the equation too?

@Dave Skow I'm starting the process of looking for lenders today. Thank you for the great advice. I'll see what I can come up with!

 Great - i think this will help 

[Timothy Hero]

Quote from @Sam Wilson:

@Timothy Hero Thank you for the advice. I'm definitely looking to scale and have started to look at how to maximize the equity vs the cashflow. For the DSCR loan. If it isn't reported on credit and the bank doesn't know about it, could I use the income on that to subsidize my personal DTI or would I have to leave that out of the equation too?

@Dave Skow I'm starting the process of looking for lenders today. Thank you for the great advice. I'll see what I can come up with!

If a lender will allow your income for an entity to count, sure. But bank statements will show there's a mortgage tied to it. If you only do DSCR lenders, you won't need to worry about it.

[Nathan Harden]

Just to piggyback off everyone else, DSCR or creative financing will be your best option for this.

[Jayson Cain]

@Sam Wilson - When it comes to financing your next deal, there are a few options you could consider. Here are some ideas:

1. Refinance one or more of your current properties: Since you have a significant amount of equity in Property 1 and Property 2, you could consider refinancing one or both of these properties to free up some cash. This could potentially improve your debt-to-income ratio (DTI) and help you qualify for a loan for your next project.
2. Consider a cash-out refinance: Another option would be to do a cash-out refinance on one or more of your properties. This would allow you to pull out some equity as cash, which you could then use for your next project. Keep in mind that this would increase your debt, and therefore your DTI, so you'll need to make sure you can still qualify for a loan.
3. Look into alternative lending options: If traditional bank financing isn't an option, you could consider alternative lending options such as hard money loans or private money lenders. These types of loans typically have higher interest rates and fees, but they may be more flexible when it comes to DTI and other underwriting requirements.
4. Partner with someone: If you're struggling to qualify for a loan on your own, you could consider partnering with someone who has stronger financials. This could be someone who could co-sign on a loan with you, or someone who could invest in your project and provide some of the financing.

In terms of moving into a new primary home to house hack, you'll want to make sure you're taking into account the costs of this move and how it will impact your DTI. You may need to wait until you've completed your current project before taking on a new primary residence.

Personally, I like using DSCR loans for my own investments and have recommended them to my clients as well. Using DSCR loans can be a good option to bypass the DTI requirement. It's a way for lenders to look at the income of the property itself rather than the borrower's income. This means that if the property can generate enough income to cover its debt service, the lender may be willing to overlook the borrower's high DTI ratio.

I hope this helps give you some ideas for how to structure your resources and move forward with your real estate investing goals.

[Irving Casas]

@Sam Wilson

Concerning your plan to buy a primary home at 500k in Oregon. In the last 9 months I had two clients close on their second home to house hack. The lender advised them to apply for a HELOC loan, at the same bank. The clients would then keep the HELOC line of credit open. They would then put their new primary home under contract. At closing they would use the HELOC funds to the down payment. Perhaps you can tap into some equity from your other investments properties.

[Stephanie Medellin]

Quote from @Timothy Hero:
Going DSCR limits all your concerns, but will decrease your cash flow. However, most investors reach a point where decreasing cash flow to accumulate more properties is the scaling process. You may be there.

Right now, the hottest lenders in the DSCR game are 7-7.25% for max LTV.

As for DSCR with DTI, DSCR loans aren't reported on credit, so unless you mention it to the bank, they won't know it exist.

 Conventional lenders will absolutely be able to find other properties you own, and they should be disclosed on your loan application, especially if you're personally obligated on the loans.  Just because something is not on your credit report does not mean the liability isn't there.

To qualify for a new primary, consult with a good loan officer about how your rental income is being calculated on your taxes.  Once you convert your current primary to a rental, you'll be able to use 75% of that income, but will need to show a lease.  That should offset most of that $3162 payment and free up your other income (including rental income from your tax returns) to qualify you for a new primary residence. 

To buy and renovate another rental property before purchasing your next primary, you just want to make sure the project is complete and leased.  You'll be able to use 75% of that rental income to offset your payment.

[Jeff Prow]

I would look at the all in one loan as a possibility, the DSCR can be used on the investment property but not your primary. You may have a couple of good options.