I have a mortgage on my primary home, and 3 other mortgaged rental properties (making that 4). I have two other rental properties that I bought in cash. One I was able to get a HELOC on. The other, I tried to get a HELOC on and was denied because the bank said my DTI was too high. I asked the bank how they calculated it, and they are adding all the mortgage payments and HELOC to the debt side (even though all properties are cash flowing). In other posts, I've read that the bank should be using just my home mortgage on the debt side divided by net income. Is this because I've had the properties for less than 2 years?
Any ideas for how I can finance another purchase? I have equity and cash flow, and a decent paying job but the banks just don't seem to have any sense to them. I have no rich uncle to ask for private financing so I feel stuck because I can't think of any way to get financing even though I have enough for a down payment and carrying the debt.
@Chris M. you need to shop around with more lenders. There are lenders (smaller banks for example) who will do up to 10 loans per individual. What state are you purchasing rental properties at?
Everywhere is going to use all of the debts, its is a matter of how they credit the income from those places.
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I had a similar problem. The same rule seems to apply for your credit score. The credit company looks at your total debt for all the mortgages but doesn't include cash flow. I would recommend you definitely look for different lenders and you will likely be pleasantly surprised. The lenders I have used have a system where they will take 75% of the rent you collect and count it towards your income. This usually balances out the debt from your mortgages. I've been able to get financing on 8 properties so far, just know that the terms of the loan will get worse after 4. You'll need 25-30% down, and the interest rate will increase. Ask some agents that work in your area which lenders are good for real estate investors and they should be able to turn you on to one that will finance properties above 4. Don't despair, this is a problem you can definitely overcome with a little legwork.
Thanks for the responses. The properties are in Florida. My score is currently around 700 (not 720), so I guess I'll have to wait a year for it to go higher?
As for DTI, something isn't right. If all debt payments were divided by the income no one would be getting financing.
@Jon Holdman had an explanation here http://www.biggerpockets.com/forums/49/topics/77330-dti
where he said
DTI = (total debt payments except rentals) / (W2 income + net rental income)
@Michael Smith do you loan in all 50 states?
Just wanted to point out - Jon Holdman's formula is using NET rental income in his equation, which already takes the debt of the rental property into account (and expenses, which is good) .
Keep searching, you should find a lender who will work with you. Good luck.
Yes, I agree @Jon Holdman's formula makes sense as it uses the net income... unfortunately the bank I was working with was not using his formula. I was wondering if that was because I've only had them 1 year.
Also, on a related note, I tend to buy fixer-uppers that need some repair and renovation which is regained in equity. However this gives me a negative rental income on schedule e, although they are really cash flowing. Do banks understand this?
Hmm...most of the banks I've dealt with do want 2 stable years. Also, I don't understand your related note. Do you mean to say that you are incurring passive losses on your tax return based on your expenses? When do you expect that situation to turn around? That may your best bet in getting additional financing.
For a particular property, most of the repairs are done within of month of me purchasing them.
But it would seem optimal to always buy more fixer-uppers every year so the renovation expenses reduce taxes???
You hit the nail right on the head when you brought up your schedule E income. By you saying that it's telling me that you bought these houses at least last year so here is an easy way to calculate your rental income PER property.
Schedule E calculations are as follows:
Add line 21
Add line 19
Add line 18
Add line 9,12,16 ( if you're using the full PITI payment ) Which the bank will if you're using schedule E income.
Divide this number by 12 for your 2013 income and repeat the same method for 2012 Schedule E
So say that you made 48K on your W2 and -500 on your schedule E. Your income would be 4K - 500 = $3,500.00 per month then divide your total credit report debts by your income to figure out your DTI
$1,500.00 in debt / $3,500.00 in income will give you a DTI of 42.86%
Now if you would have purchased this home this year you could you 75% of the lease agreement. So if the lease agreement is $1,000.00 then you could add $750.00 dollars to your W2 or Schedule C income or whatever you claim on your 1040's
In conclusion if you have a home on schedule E you won't be able to use the 75% calculation and if you bought the home in the same year you want to use the income you can use the 75% calculation.
It's really important to get with a broker or Loan officer who knows when to use the appropriate calculations and also is in it for the long run with you. This way they will know your situation because they've done all your financing for years.
Oh and you don't need 2 years of rental history for your income to count. This is typically an investor ( bank ) overlay.
I just got thru this hurdle myself. Although my credit score is above 800, you need to be talking to the commercial lending side of the bank, not the residential mortgage side, which you have max'd out, per their regulations. Talk to the smaller local banks( commercial side for small businesses), go prepared with a business plan, 2 years of tax returns, download their debt and asset form - fill that out & bring with you. And go there with the attitude that you are interviewing them for your business to see how they fit with you, not begging for money. Also, there are ways to improve your credit score.
You can do it!
I think you have a couple of options here. Conventional non owner occupied lenders should calculate your DTI as your personal long term debt (more than 12 payments remaining) + (your investment monthly payments) divided by your your personal income + rental property income * 75% (only 75% on rental income is counted to allow for vacancies and maintenance).
There is a new investor product on the market called a Blanket loan. The reuirements for this are a minimum of 5 properties can be on the loan and a mimimum loan amount of $500,000.
I would find lenders to finance your investments and calculate your DTI as i mentioned above and then put your investment properties under a blanket investment loan.
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Hi @Michael Smith , I sent you a PM. Looking for a HELOC on a FL rental condo. We've got more than 4 mortgages but excellent credit.
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