Need some advise about financing options going forward

7 Replies

I am a starting buy and hold investor and I bought my first rental property last October. Got it rented out last December and it looks good now. So I am ready to move forward and acquire more. I talked with a mortgage broker today and got a little frustrated. Here is my situation:

I have two mortgages, one for my home and the other for the first rental. Because I was not planning when buying first home, I used 15-year term and now my debt to income is 39% which is pretty high from lender's perspective. I was told I can still finance a 120,000 property but my goal is to acquire at least two more this year. 

The problem I have is that I have about 100k budget for the year so 120,000 is far from enough for me to borrow. And if I buy one property by cash, my debt to income will go higher and I won't be get loans any more.

I thought getting my first property rented should count as some income but just realized it takes two years for lenders to consider it positive. 

To make it short, I have some cash ready and my credit score is 740, but because of 39% debt to income already leaves me few options.

Any advice will be welcome:)

Hi @Zach Liu , I don't have ton of experience with such things, so hopefully you'll get a few responses from financing experts, but I can tell you that we just closed a loan with a debt to income of just barely under 45%, and they managed to convince underwriting to accept our rental income even though much of it has been in place for a year or less (we have owned the place over two years though). Anyhow, I guess the point being that one option might be to talk to a few more lenders as their policies will differ. I've found that going with a bank that holds their own loans and/or sells direct to Fannie Mae gives them more flexibility than other brokers who have to deal with more overlays (extra rules placed on the approval process). Good luck.

@Zach Liu  

The situation you described is pretty common. I have seen a lot of new investors run into the issue you described. The issue happens when individuals try to buy the homes in their personal names as you describe and then they assign the property via quit-claim-deed to an entity (your LLC). I don't know if you have assigned it to any entity. What happens is that the loan is under your personal name and it is reported by the banks on your credit agency. What does this mean? This mean any properties you buy will show up on your credit report in essence your debt-to-income will be higher..This means you don't look as favorable to the banks. You can certainly buy multiple properties under fannie mae guidelines https://www.fanniemae.com/content/guide/selling/b2... However, there are reserve requirements that you need to maintain for each properties. I believe its 6 months PITI reserve for each property you own.

So now the question is  how do you buy multiple properties without impacting your personal credit and debt-to-income. 

Here is my two cents: Not a legal advice so please do your own due diligence

Step 1: Go to a small regional bank and  speak to someone who deals with small business loan or small commercial loan depending on the $ Amount

Step 2: Tell them that you are a real estate investor and looking to build a portfolio of cash flowing properties. You currently have your entity structure. For example you can tell them you have a Real Estate holding company that will buy n number of properties under separate LLC's. You are looking for a loan to start with 1 property under an LLC and that you will provide the banks with a personal guarantee

Step 3: Most likely you will be referred to several people. Eventually you will find the right person. I see that you are in Atlanta. I can send you some names if you PM. Full Disclosure: I have no affiliation with any of these bankers etc. It will just save you the trouble

Step 4: Like any other loan application you will be requested to submit Personal Financial Statement (PFS), Paystubs, W2, Tax etc. 

Step 5: The banks will give you an early indication 5-7 days that your application is looking good/not so good 

Step 6: If its good then your file will go to underwriting etc. For these type of loans you need to put 20% down minimum

Step 7: Underwriting approves. You  set closing and you get the keys to your new house and give it to the tenant.

Now since the loan is under your LLC it is not reported to the credit agencies and it does not come under your credit report. This will allow you to give a personal guarantee and get a loan.

Pros: Loan does not get reflect on your credit report, under your entity

Cons: Higher interest rate, higher down payment, you won't be eligible for HELOC but eligible for HLOAN. I am sure other investors might have better idea and think what I am suggesting might be an overkill. However, do your own research and see what works best for you and seek input from other investors.

Anyways thought this might help your situation..Just one idea to consider. Also don't try big banks  work with smaller community banks.

Good Luck

You dont need 2 years to used proposed income tell the banker to switch it to Fannie Mae and if he cant do it then that means his bank has limited him/her to a 2 year landlord rule on rental income use.

@Zach Liu  

When you buy a property with a net positive rental income you should be increasing your income and lowering your DTI.

I hear about the above each and every day.

You can definitely finance more if you refinance your 15 year to a 20 year or 30 year. You can do the 20 year and set up bi weekly payments and you'll cut it down close to 17 years usually. This will lower your DTI and can usually be done simultaneously with the next purchase you do so you're not sending out documents to two different places at different times.

You'll hit a wall once you get to 4 financed properties with the fannie mae/freddie mac loans everyone has rightfully advised you to seek out. Once you hit that mark, you can get portfolio loans that don't require you to have the 2 year rental income and only consider the debt/cash-flow of the property you wish to purchase. Just consider that your first 4 financed properties will be the least expensive financing possible. After that, expect more down payment and higher interest rates. But still much better than hard money.

Thanks for all the help, It definitely clears my mind!

@Zach Liu   if the property isn't on your tax returns 75 percent of your lease agreement is considered with a house you currently own. If it is a home that you are purchasing 75 percent of the potential income is considered.

Hi Zac,

I have access to other financing options which are heavily weighted on the asset.

--Typically max LTV is 65% but the true loan amount is calculated off the income vs the expenses and debt.

--Rates 3 year terms around 4.5%-4.75%…5 year terms around 4.99%-5.5%

--Amortization normally 20 years

--Clients to close in an entity name or have an itin#

--Prepayments vary per lender normally 0-1%...3,2,1 step down.

--Min loan amount 100k…good to use if the client has multiple smaller properties.

--Bank fee $295-1.5%

--Broker fee 1.5% discounted from the 2%

--client pays for appraisal and title

--Close time 35-45 days

Contact me for me for more details.

Regards,

Lior

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