Difficulty refinancine

18 Replies

I have a duplex I am trying to refinance. I purchased and rehabbed it, using a short term loan. I now need to refinance to a longer term loan. A local bank initially seemed interested. It cash flowed with just one tenant, but has two leases, so I'm cash-flowing over $1000/month, after all expenses. The bank decided to turn us down because our debt/income ratio didn't meet their criteria. This was AFTER the bank stated they looked at the property financial first. If they had "concerns", then they looked at our finances second. Since it was cash-flowing so well, and fully leased, (and owned by us for just over 2 years), I didn't think this would be  a problem. Our debt/income took a hit because we just got into RE Investing almost 4 years ago. I don't get it. It's like the banks WANT you to fail. I used non-traditional funding because the place needed rehabbing, and was empty. A bank wouldn't loan on the property as it was. Now that it is a performing asset, the bank finds other criteria to say no. I plan to seek out other banks, however, how do I interview THEM, so I don't waste my time gathering all my paperwork up front. How do you get them to tell you what they are REALLY looking for? Any tips on how to tactfully work with banks to effectively communicate with them would be appreciated!

Inquire with local banks and credit unions. Hopefully the refinance would improve your DTI and not worsen it. If you will not qualify conventionally then ask if you might qualify commercially. Typically the cutoff for conventional DTI is around 45%. With a commercial mortgage they may not really look at your personal DTI but at the property itself. You could look at improving DTI by paying off short term debt as well.

Prepare a loan package that you can deliver to multiple lenders - it should include the financials and a one page summary of the asset, its performance history and what you are requesting.

It appears this is a residential duplex but I would still recommend Commercial Mortgages 101 by Michael Reinhard - it is a quick read and packed with great advice on how to put your best foot forward with lenders. There should be ideas that will be applicable to a residential duplex.

If your time is limited, you might also try to locate a debt broker who can reach out to a wide breadth of debt sources on your behalf.

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@Carin Kveton I work with a lender that is a true asset based lender. They evaluate the property based on its performance and your DTI will not be an issue for them if the deal is sound which from the info provided sounds like it is.

I've been there as an investor where you do all the right things and it is tough to find financing.  They use a more common sense approach to lending to service landlords.  They lend in IL (except in Cook County and Chicago) and 34 other states as well.

If you want more info shoot me a PM and I will get details over to you about the programs they offer.

Originally posted by @Carin Kveton :

I have a duplex I am trying to refinance. I purchased and rehabbed it, using a short term loan. I now need to refinance to a longer term loan. A local bank initially seemed interested. It cash flowed with just one tenant, but has two leases, so I'm cash-flowing over $1000/month, after all expenses. The bank decided to turn us down because our debt/income ratio didn't meet their criteria. This was AFTER the bank stated they looked at the property financial first. If they had "concerns", then they looked at our finances second. Since it was cash-flowing so well, and fully leased, (and owned by us for just over 2 years), I didn't think this would be  a problem. Our debt/income took a hit because we just got into RE Investing almost 4 years ago. I don't get it. It's like the banks WANT you to fail. I used non-traditional funding because the place needed rehabbing, and was empty. A bank wouldn't loan on the property as it was. Now that it is a performing asset, the bank finds other criteria to say no. I plan to seek out other banks, however, how do I interview THEM, so I don't waste my time gathering all my paperwork up front. How do you get them to tell you what they are REALLY looking for? Any tips on how to tactfully work with banks to effectively communicate with them would be appreciated!

 Here are your possible options:

Conventional financing - 30 year fixed around 4.5%. This will require your DTI to be 45% or below no matter what bank you work with. This is going to be hard if you do not have a W2 income and have been doing this for just 2 years.

Asset based financing - 30 year fixed around 7.5%.  This loan looks more at the cash flow of the property and less at your personal finances, but the rates and fees are pretty high on this.  Expect to pay a few thousand more in closing costs.

Commercial financing - 5 year fixed around 5%.  This loan is based off the performance of the property and your ability to run a business.  The closing costs are more in line with conventional but the terms are usually 5 years and have pre-pay penalties

This is why I ALWAYS tell people looking to rehab and hold to get prequalified before they buy. The qualification terms are the same if you are buying new or already own and you need to be well versed in what they are looking for. DTI is the hardest obstacle to overcome as you grow as an investor and how you prepare your taxes becomes crucial. I also suggest you check out the financing videos here https://www.biggerpockets.com/courses/a-beginners-...

Very good breakdown @Brie Schmidt . The BRRRR strategy is a very viable one, but having financing lined up in advance in my opinion is pretty much the entire strategy. People tend to just focus on the front end financing which is only half the equation and often easier to obtain.

The asset based lenders have their niche because of the fact that they base a lot of their decision to lend on the asset (which helps newer investors with little or no track record) and can be a really big help to experienced investors who are looking to purchase or refi and do not want to deal with the seasoning and DTI requirements that conventional and even some portfolio lenders have.

@Carin Kveton , find someone that will show you their numbers and math, that way this whole DTI thing isn't a mysterious black hole, but something that you actually know and understand.

More than once, reviewing my numbers with borrowers, I've had them identify solutions that I didn't think about because they know their financial situation way better than me just looking at their tax returns and paperwork. 

Most probable cause of loan denial, in this case, is someone taking an average from your tax returns for rental income, which isn't appropriate if one of the units is newly rented out. But it could be something else. 

With the commercial financing, while 5 years are typically fixed, the amortization is usually over 20 or 25 years so the monthly payment may be nearly as low as a 30 year fixed (at least for the first 5 years).

Portfolio lenders might be the way to go. You asked if you should inverview them, my answer would be 100% yes. 

I just had a RE friend of mine come across an unusual property that most banks wouldn't lend on. He walked into 30 different banks and spoke with their "specialists" and underwriters. He found 3 interested and 1 that eventually did the loan.

You might have to do that. Your deal sounds good so I don't see you having too many problems finding a bank that will do the loan.

Portfolio Lenders can do what they want, but in my 3 years of looking for one with reasonable rates I have yet to find it.  They all tent to be in the asset based lending category with rates above 7%.

I will explain DTI to you in case you don't know. Look at your taxes last year and take your income before taxes (if 1099 it is your income less expenses, average of the last two years.) Divide that by 12. If you have rental income you can check out my net rental income calculator to understand how banks look at income on your schedule E

https://www.biggerpockets.com/files/user/chicagobr...

Let's say that number is $10k a month. There are two equations, front end and back end DTI.

Front end - 28% of gross monthly income. So in this scenario it is $2800 - that is the max payment (PITI) that you can be approved for

Back end - 45% of your gross monthly income less expenses on your credit report.  So $4500 in this example.  But let's say your car payment is $500, your student loan is $500 and you have a $2000 mortgage on the house you currently live in.  That means $1500 is left for your max DITI payment.  

Back out taxes and insurance and that leaves you with your max principle and interest payment.  For conventional your payment will be $500 for every $100k you finance.  So in this scenario the lowest of the two is $1500, say taxes and insurance are $500/mo that leaves $1000 = $200k loan

One time my DTI was borderline, I had a car payment of $400 a month with a $8k balance. That is $80k of house I can't get so it was a no brainer to pay off the car and get $80k more in house

@Brie Schmidt I always found the DTI calculation for real estate investors confusing. Say I have 10 properties that rent for $1000 each and have $500 mortgage payments and $250 other expenses, how do you calculate DTI? The last lender I approached took the net income from my Schedule E (in this case - $250*10 = $2500), and divided my mortgage payments over that income ($5000/$2500 = 200% in this case). I am pretty sure that was not the right way to do it, but I was unable to get him to reconsider - he was basically stuck at "DTI is all debt divided by all income, this is how we calculate it"

Originally posted by @Rumen Mladenov :

@Brie Schmidt I always found the DTI calculation for real estate investors confusing. Say I have 10 properties that rent for $1000 each and have $500 mortgage payments and $250 other expenses, how do you calculate DTI? The last lender I approached took the net income from my Schedule E (in this case - $250*10 = $2500), and divided my mortgage payments over that income ($5000/$2500 = 200% in this case). I am pretty sure that was not the right way to do it, but I was unable to get him to reconsider - he was basically stuck at "DTI is all debt divided by all income, this is how we calculate it"

My lenders sent me the calculator I linked to. They told me they take your schedule E gross rents less expenses, then add back in mortgage interest, insurance, taxes, and depreciation. Take that and divide by 12, minus your PITI payment and that is your monthly net income.

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@Brie Schmidt "minus your PITI payment and that is your monthly net income."

Do they count the mortgages as debt in this case? If so, it would seem that PITI is being double counted...

Originally posted by @Rumen Mladenov :

@Brie Schmidt "minus your PITI payment and that is your monthly net income."

Do they count the mortgages as debt in this case? If so, it would seem that PITI is being double counted...

Read the above post, you add back in interest, taxes and insurance, and then take out the PITI payment

@Carin Kveton

I would find a lender that allows for higher DTI's. Do you know your DTI? Ask around to other lenders if it is an acceptable DTI for their company. There are many factors that go into play as well, but it is a good start.

Originally posted by @Jerry Padilla :

@Carin KVeton

I would find a lender that allows for higher DTI's. Do you know your DTI? Ask around to other lenders if it is an acceptable DTI for their company. There are many factors that go into play as well, but it is a good start.

 Jerry- Thank you, yes. I am continuing to "shop". Thanks for the info!

Originally posted by @Brie Schmidt :
Originally posted by @Rumen Mladenov:

@Brie Schmidt I always found the DTI calculation for real estate investors confusing. Say I have 10 properties that rent for $1000 each and have $500 mortgage payments and $250 other expenses, how do you calculate DTI? The last lender I approached took the net income from my Schedule E (in this case - $250*10 = $2500), and divided my mortgage payments over that income ($5000/$2500 = 200% in this case). I am pretty sure that was not the right way to do it, but I was unable to get him to reconsider - he was basically stuck at "DTI is all debt divided by all income, this is how we calculate it"

My lenders sent me the calculator I linked to. They told me they take your schedule E gross rents less expenses, then add back in mortgage interest, insurance, taxes, and depreciation. Take that and divide by 12, minus your PITI payment and that is your monthly net income.

 Brie- Thank you for the info. I'm sure that lenders look at properties differently than investors do. This helps me understand what it is that they are seeking.