High DTI- have assets to use as collateral but can’t get loan
Residential Real Estate Broker · Miami, FL · Member since 2017 · 5 posts · 1 vote
I have been investing in RE for the past 3 years now. It’s been a great journey! However, I’m stuck now.
My debt to income is high and I can’t get any new loans.
I currently have 2 properties in Orlando Florida, free and clear , each worth 80k-90k. I would like to get some cash out and continue investing. Both properties are profitable, but no bank wants to put a mortgage on it due high DTI.
I would really like to keep them. I already saw at least 3 opportunities to make a flip and make money, but got stuck on the financial part.
Any suggestions?
At the San Francisco Bay Area Summit that ended today in Oakland, hosted by @J. Martin, I actually did some quick mental math and derived a new "rule" to answer someone's question on the fly. 1% rule, 50% rule, all these rules, now there's a new one. A question I got during the breakout sessions was essentially about "when do I have enough cashflow that I can quit my job and still get additional normal 30YF mortgages?"
Now that I'm home, I've tested this rule a few different ways, and will share it.
So, here's the new rule that I've made up.
If your monthly cashflow is 2.5 times GREATER THAN your personal monthly PITI added to the sum total of your monthly consumer debt obligations, then you should be able to quit your job and continue to get investment property mortgages, assuming you are buying cashflow positive assets.
This isn't a "Mortgage 101" answer, nor is it a "Mortgage 202" answer, this is like if you're a Junior at Berkeley or something, so I'm assuming you're into it enough to know how rental income is calculated, etc.
Example.
- Personal SFR house PITI is $2000.
- Monthly car loan payment is $300.
- No other consumer debt.
- Monthly cashflow from the rental portfolio is $6,000.
- 2.5x PITI+ConsumerDebt = $2300 * 2.5 = $5750, which is less than $6,000, so the "Mason Rule" says it should work! NOTE: I assure you that the Mason Rule is not named after anyone in particular, it was just coincidentally mathematically derived while in a Scottish Rite Masonic Temple, hence the name. :P
- Let's test it... DTI will be $2300 / $6000 = 38%. And we can go up to 45% DTI all day long for Fannie loans.
- Loan approved, assuming nothing else gets in the way.
So there's your "when can I quit my freaking job but still get normal 30YF mortgages!?" number, hot off the press, literally I derived this today: when your net monthly cashflow from the rental portfolio is 2.5x your personal monthly debt obligations, which is the summation of your personal SFR home PITI plus all consumer debt obligations, you should be able to quit your job and continue to get financed, providing you are purchasing/refinancing cashflow positive 1-4 unit residential real estate.
Since this is relatively new and just derived today, I'd be super open to people pressure-testing it by throwing scenarios out there for the other mortgage professionals and I to play with, or to folks trying to find ones that pass the Mason Rule test, but that do not actually work.
Does anyone want to be my beta test? We'd submit the loan to underwriting without including your W2s or paystubs in the submission, even if you still have that W2 job...
try alternative lenders other than commercial banks. if they still say your DTI is too high then pay off some credit card balances. check your credit report and get some old/bad debt removed via dispute. my coin.
Kudos,
Mary
@Andre Alves You haven't mention what is reason of high DTI? Sometime individual lenders overlays could be making your DTI higher. Try to work with lender who is expert in investment properties calculations.
@Andre Alves If you have 2 properties that are free and clear and you want to pull cash out to buy some more properties, then pull some of the cash out to pay off your debt that is causing you to have a high debt ratio. These debts can be paid off in escrow and therefore not counted in your debt ratio. With the rest of the money, use it to continue investing.
Rentals really shouldn't be adding to your debt ratio, or if they do, it wont add much, unless your not buying the properties at the right price. I'm sure your buying them correctly, so just solve the debt ratio issue and keep on investing from there.
I have been investing in RE for the past 3 years now. It’s been a great journey! However, I’m stuck now.
My debt to income is high and I can’t get any new loans.
I currently have 2 properties in Orlando Florida, free and clear , each worth 80k-90k. I would like to get some cash out and continue investing. Both properties are profitable, but no bank wants to put a mortgage on it due high DTI.
I would really like to keep them. I already saw at least 3 opportunities to make a flip and make money, but got stuck on the financial part.
Any suggestions?
At the San Francisco Bay Area Summit that ended today in Oakland, hosted by @J. Martin, I actually did some quick mental math and derived a new "rule" to answer someone's question on the fly. 1% rule, 50% rule, all these rules, now there's a new one. A question I got during the breakout sessions was essentially about "when do I have enough cashflow that I can quit my job and still get additional normal 30YF mortgages?"
Now that I'm home, I've tested this rule a few different ways, and will share it.
So, here's the new rule that I've made up.
If your monthly cashflow is 2.5 times GREATER THAN your personal monthly PITI added to the sum total of your monthly consumer debt obligations, then you should be able to quit your job and continue to get investment property mortgages, assuming you are buying cashflow positive assets.
This isn't a "Mortgage 101" answer, nor is it a "Mortgage 202" answer, this is like if you're a Junior at Berkeley or something, so I'm assuming you're into it enough to know how rental income is calculated, etc.
Example.
- Personal SFR house PITI is $2000.
- Monthly car loan payment is $300.
- No other consumer debt.
- Monthly cashflow from the rental portfolio is $6,000.
- 2.5x PITI+ConsumerDebt = $2300 * 2.5 = $5750, which is less than $6,000, so the "Mason Rule" says it should work! NOTE: I assure you that the Mason Rule is not named after anyone in particular, it was just coincidentally mathematically derived while in a Scottish Rite Masonic Temple, hence the name. :P
- Let's test it... DTI will be $2300 / $6000 = 38%. And we can go up to 45% DTI all day long for Fannie loans.
- Loan approved, assuming nothing else gets in the way.
So there's your "when can I quit my freaking job but still get normal 30YF mortgages!?" number, hot off the press, literally I derived this today: when your net monthly cashflow from the rental portfolio is 2.5x your personal monthly debt obligations, which is the summation of your personal SFR home PITI plus all consumer debt obligations, you should be able to quit your job and continue to get financed, providing you are purchasing/refinancing cashflow positive 1-4 unit residential real estate.
Since this is relatively new and just derived today, I'd be super open to people pressure-testing it by throwing scenarios out there for the other mortgage professionals and I to play with, or to folks trying to find ones that pass the Mason Rule test, but that do not actually work.
Does anyone want to be my beta test? We'd submit the loan to underwriting without including your W2s or paystubs in the submission, even if you still have that W2 job...
@Chris Mason, I am voting that you put this as its own forum post. I have a feeling that it will get quite a bit of response.
@Chris Mason, I am voting that you put this as its own forum post. I have a feeling that it will get quite a bit of response.
I thought about that, but I'd like a solid closed beta test before I lead with it.
I see that you're a fellow lender. Can you run some 2.5x Mason Test scenarios, and see if you can break it? If it's easily broken, then it goes out the window... It almost seems too simple / easy, now that I have it in front of me, and I'm afraid that I've overlooked something!
I'll do some crunching, but my first inclination, even before the numbers would be: is someone with 2.5x their cashflow already fannie/freddied out typically?
I'll do some crunching, but my first inclination, even before the numbers would be: is someone with 2.5x their cashflow already fannie/freddied out typically?
Typically, perhaps. @Account Closed is hovering right around meeting the Mason Rule (yes I'm trying to make that a thing), next years tax returns will probably have him meeting it.
Value-add investors that have been buying for five years or so, and not doing cash out refinances every 5 minutes or living in McMansions, I think, would be the model match. We like people that live frugally, but invest liberally.
It'll be a niche for the unusually successful. I like people that are unusually successful. :)
It also gives folks starting out a goal to reach for.
I think that most folks passing that test, will also have no problems getting commercial financing. Which is kind of our goal as residential REI-friendly lenders: to get them to the point where they're Warren Buffet or Donald Trump, own too much cashflowing real estate for Fannie to handle, and thus can't get gov't subsidized loans but can continue to kick butt using commercial. :P
..."derived while in a Scottish Rite Masonic Temple".
@Chris Mason, good one!
I'm running into the same problem, 5 properties, 2 full paid off properties, the other 3 with a lot of equity, 740 credit score, most of the expenses are mortgage loans, the rest is a 11k in a personal loan and about $800 in credit cards, unfortunately no full time job anymore, running 3 airbnbs which are doing very well, but from my calculations my DTI is around 60-65% right now, my 2017 return should be much better (thank you Airbnbs!) but I don't have my hopes up, most banks seem to want 45% with some saying 50% might work. Hard to see deals pass you by and the investors with cash grabbing them!
@Andre Alves Try a local commercial bank. They should allow you to put both houses up for collateral and lend a line of credit. I'd expect them to lend up to 65-75% of the total value of the two properties. They'll also underwrite it based on cash flow of the two collateral properties.