How to get passed DTI

Question

I've listened to a number of BP Rookie ('regular') podcast episodes about how people with low income have been able to acquire properties. Many podcast guests state that they use conventional financing to purchase their properties. How does one do this given DTI restrictions? Can DTI be avoided by transferring properties to an LLC?

Thank you!

Chris Seveney · Answer

@Chris Gallick

You can do DSCR as mentioned but it’s a very high risk investment. To be blunt people with low incomes shouldn’t be buying real estate as an investment. They should buy a primary home to understand costs of home ownership and try and save money and lower their expenses.

Just my 2 cents as one bad real estate deal when you don’t have a lot can set you back years

Chris Marshall · Answer

@Chris Gallick

So what I've always taught people is to utilize small community banks. Ask them to put this as an "in house" commercial loan with the note being held against a specific property. This is often times the absolute best and cheapest capital you could recieve as an investor. It is not easy and many banks will tell you no they can not do it although they absolutely can if they are a true community bank. The key is to show them how the investment benefits the community. This is how I got started and how I help others do it. Let me know if you have questions.

Doug Smith · Answer

Dodd Frank legislation passed in 2010 requires lenders to verify income on consumer loans. That is why the DSCR loan has gotten popular. Since it's for investment purposes and most of those loans are made to LLCs or S-Corps, it makes them "commercial", therefore, exempt from that requirement. They cash flow the property in those loans, not you. There were only three lenders that I know of that had an exemption to that because they were lending in underserved areas, but two recently got out of that business. If you can't veryify your personal income to qualify conventionally (or via FHA), then going the "commercia'l" route with that 20% or more down payment is the best option you've got.

Eric Veronica · Answer

Moving title to the LLC does not change your debt to income ratio.  The loan is in your name and will show up on your credit report. Whether or not the title is in your name or the LLC is irrelevant because the mortgage is still in your personal name.

I am assuming from your question about DTI that you are asking about DTI restrictions when you are planning to purchase a handful of properties over a period of time.  They way around this is pretty simple. You  just rent your property out with a 12 month lease.  Conventional guidelines allow you to offset the mortgage payment + property taxes + insurance if you have a lease.  In high cash flowing areas, like the Midwest, you can usually use the rent to offset the entire payment.

For example, lets say you purchased property 1 in January.  The monthly principal and interest payment is $750.  Then in February you have a tenant sign a lease for $1200/month.

Then lets say in March you go under contract to purchase investment property number 2 and you apply for a conventional loan. When doing the debt to income calculation we will use 75% of that $1200 monthly rental income on property 1 lease which results in usable rental income of $900/month.  This $900 monthly income will completely offset your mortgage payment on property 1 and even give you additional qualifying income of $150 per month On property 2  mortgage your DTI will actually be lower than it was when you purchased property 1 just two months earlier.  You can continue to repeat this process.  I have actually had customers purchase ten properties in one year where the debt to income ratio on the tenth purchase mortgage was actually lower than their DTI on their first.

I will warn you that a lot of conventional lenders have overlays which will not allow you to use this rental income until you have owned the rental properties  for a certain period of time.  Make sure you ask your lender up front if they have any additional rules that will not allow you to use the rental income right away.

Feel free to reach out if you have any additional questions.

Devin Peterson · Answer

Chris,

There is no avoiding DTI with conventional financing. If you’re looking to acquire a property using a business entity or LLC you need to seek out DSCR loan products. This is a completely different lending space where DTI does not exist.

Jankely Hidalgo · Answer

initially a loan officer will deny you but who cares ask to speak to the underwriter. those are the people who actually look at your loan.if your DTI is high because of an investment property or an income producing asset, and you have proof of payments showing that it is producing income and paying for itself. once you do this they do not count that as debt against you and will be able to approve you.think about how people buy investment properties, after 2 your DTI is messed up. this is how you get around that. also put the properties in its own entities

Chris Gallick · Answer

Thank you everyone for providing thoughtful responses! Truly appreciated.Thank you @Eric Veronica ! This is exactly what I was trying to figure out.

How to get passed DTI

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