Loan with low Income but lots of Assets
Investor · Palmetto, FL · Member since 2014 · 27 posts · 3 votes
Loan with low Income but lots of Assets
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Realtor · Grand Rapids, MI · Member since 2016 · 174 posts · 122 votes
8y@John Barnes You need to hit the phones and keep calling more lenders that count their rental income. I have lenders that will even allow you to buy a property based off the rent of the current tenants, at an appraisal of 75% LTV. For frame of reference, my team has called over 400 lenders in our state in the last year. Try to shoot for lenders that have lending portfolios of $250 million or less. The key is your investors have very good credit quality so alot of banks will open their lending for high credit quality.
22 Replies
- Realtor · Grand Rapids, MI · Member since 2016 · 174 posts · 122 votes8y
@John Barnes You need to hit the phones and keep calling more lenders that count their rental income. I have lenders that will even allow you to buy a property based off the rent of the current tenants, at an appraisal of 75% LTV. For frame of reference, my team has called over 400 lenders in our state in the last year. Try to shoot for lenders that have lending portfolios of $250 million or less. The key is your investors have very good credit quality so alot of banks will open their lending for high credit quality.
We were in the same situation. We were able to move forward with commercial financing from a portfolio lender. The terms aren't as good but you can do more than 4 units at a time. We were able to do a deal for 13 units at 5% on a 5yr adjustable 20 year loan. The commercial lenders look at assets and the quality of the deal.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes8y
Originally posted by @John Barnes:
Hi Everyone,
I'm trying to assist someone in obtaining a loan. The person in question:
Owns primary residence (300K)
Has +-300K in equities
Income of $35,000
They took out a HELOC and used those funds to buy a 4plex for $120,000.
They have waited 6 months and are attempting a cash out refinance to then pay down the HELOC. I am trying to help them obtain financing but the issue appears to be their Debt to Income Ratio. Lenders have been requiring 40% down and the best rate I found was 5.625% on a 15 year note.
Both credit scores are over 800 so there is no issue there.
I'm trying to ask and see if there is something I'm missing, or if there is another avenue I should explore.
It seems silly that Income is an issue when they have so much liquid assets? I don't fully understand why the banks are looking strictly at DTI when a borrower has good, liquid assets.
Any direction would be great. thanks
John
Hi John,
Options, in order of ideal v not ideal...
- Find an REI-friendly residential lender, and give them a whack at making it work using rental income. It can "count" in the DTI math even before it appears on two years of tax returns.
- Call the HELOC lender, see if they will "fix" a portion (or all) of the HELOC and put it on amortized payments. They might bump the rate 0.25% or 0.5% higher than current in exchange for fixing it, but this protects them against the Fed raising rates again (most HELOCs are tied to Prime).
- Commercial financing. These are almost all ARMs, but they are already in an ARM, so the only advantage would be the fixed 'teaser' period and hoping they can get a normal mortgage before that fixed teaser period is up.
- Investor · Palmetto, FL · Member since 2014 · 27 posts · 3 votes8y
Thanks for the replies, everyone.
The property is currently leased for $2,500 a month in total, however lenders have been resisting using that income due to the fact it is not on a tax return yet.
If any lenders see this and want to close an easy loan, please reach out!
thanks
John
- 8yJonathan PfluegerPro MemberBen Lomond, CA · Member since 2016 · 338 posts · 337 votes
I am very interested in what you mean by "lenders that have lending portfolios of $250 million or less." Are theses types of lenders more likely to be flexible when it comes to overlays and such? How did you come by that number?
I have called my fair share of banks and lenders - not nearly 400 - and you are right on the money, so to say. Standards, overlays, and just about anything varies from bank to bank and lender to lender.
- Realtor · Grand Rapids, MI · Member since 2016 · 174 posts · 122 votes8y
@Jonathan Pflueger My husband @Charles Kao is the numbers guy but this was a number he came up with because it keeps the banks far way from many of the Dodd Frank restrictions (which could go away), as well as it makes each loan very important. He and I both worked at 3 very large banks between the both of us at one point and what we were horrified to see was that the banks we worked at called many performing loans on balloons because they had pressure to unload debt, and just write them off of the books. A smaller lender with assets under $250 million cannot do that without going completely under and they would not get federal assistance or a bailout because they are not needed, so they would just be sold off to another large financial institution if they took writeoffs like that. The other aspect is that banks with lending portfolios of $250 million or less do not have a lot of layers of underwriting. So for example a bank that we use, the loan literally went to the CFO of a company that saw fundamentally the loan did not meet their requirements but with our credit quality and history they knew it was a good loan so they approved it. Working in commercial lending, it would happen a lot at the larger banks where you'd see loan request comes through that just made sense but the computer would deny, that doesn't happen at smaller institutions. Now there are times where I would be use a large bank as well but I would say the 100-250 million in lending portfolio is a solid number from what we have seen.
- 8yJonathan PfluegerPro MemberBen Lomond, CA · Member since 2016 · 338 posts · 337 votes
That is amazing insight and makes soooo much sense. I have never thought to look at lending from that perspective and it really changes my outlook for vetting banks. I have been developing a relationship with a small local bank in my community but I have never asked this question.
I am going to set up a meeting with one of their loan officers, which I believe is a VP there, and start asking questions. I feel like just having this little piece of information make all the difference when presenting potential deals to small banks and I am definitely going to use it.
Is there anything else you look for in a small bank?
Thank you for your insights, greatly appreciated.
- Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes8y
A conventional lender should be able to do this by using the rental income and/or "earnings" from the assets. If a 2 year tax return hostiry isn't available, then the lender takes roughly 75% of the current rental income to add to the Borrower's income for qualifying. Most of the time, the rental income can offset at least the investment property, so it's like a wash.
Make sure the lender knows that there is rental income.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Let me get this straight...the owner has low income and is not interested in investing their liquidity in the property but you expect the bank to be interested (and at a lower rate of return than what the owner achieves to boot)?
$180k pretax is not a lot of investable or liquid net worth. Let's not go back to 2008.
Sorry for the tough love reply.
- Realtor · Grand Rapids, MI · Member since 2016 · 174 posts · 122 votes8y
@Jonathan Pflueger With the small banks be prepared that you may have more difficulty getting access to things like online banking and absolutely do not make anybody mad. We have a bank where the person who took the loan application, was also the underwriter, processor and loan closer, and we referred a client of ours to him that pissed him off. Needless to say, he got a loan but they did not make any exceptions for him. This same bank, has the worst online banking and they did not have bank statements only payment vouchers which was hard for other lenders requesting complete statements. Just keep that in mind that it's not always gravy on the back end, including access to pull funds, which is one of reasons why we sometimes choose large lenders. The other thing is make sure the deal makes sense for the bank and lender as well. If they do not make money, and decent money then they will not like you. I had a loan product get approved where I knew I would be closing out the loan product due to the sale of a home in only 2 months and after figuring out they were only going to make a few hundred dollars not including labor after their fees to close the loan I asked them to charge me for a broker price opinion and closing fee, which they originally were not. The financial institution was so impressed we were concerned that they were taken care of, and that because of my banking experience I knew it didn't make sense for them they almost always take a second and third look at any deal we send to them and hear us out when we explain why it works for them. I know that sounds extreme, but if you really help people they will help you out. Lastly, a lot of people reading this are going to ask me who these lenders are that give us some awesome financing, and my answer to that is, you can call every bank in your state every year like we do, or you can become our client to have access to our list, but we don't give that for free;-)
- 8yJonathan PfluegerPro MemberBen Lomond, CA · Member since 2016 · 338 posts · 337 votes
Smaller banks really are a different breed. I really like your part about making sure a deal makes sense to the lender and the bank - that is just really good business.
Thank you for your advice, very, very helpful.
- 8yGeorge DespotopoulosBusiness MemberLender · New York, NY · Member since 2016 · 936 posts · 287 votes
@John Barnes Another option would be a non-bank/specialty lender. Lenders that operate online and direct to your borrower (or broker-to-borrower). You mostly see ARMS in this space as well. The advantage is that it's underwritten as a commercial loan (it's basically asset-based lending) so the borrower's DTI does not come into play. The rates will be a little higher, 6.5% - 8.5% depending on LTV, FICO, their experience in owning a rental property. I've seen 7/1 ARMS, with 1-2 prepayment penalties, so these could be a solid option for your investors. It's much easier than dealing with a bank since everything is online and they're doing non-owner occupied loans, which means way less regulatory compliance issues.
MoFin Lending4.9152 Reviews - Investor · Palmetto, FL · Member since 2014 · 27 posts · 3 votes8y
Originally posted by @Mike Dymski:
Let me get this straight...the owner has low income and is not interested in investing their liquidity in the property but you expect the bank to be interested (and at a lower rate of return than what the owner achieves to boot)?
$180k pretax is not a lot of investable or liquid net worth. Let's not go back to 2008.
Sorry for the tough love reply.
Hey Mike,
Appreciate the reply. This is the kind of advice I'm here for. I'm not sure why the bank wouldn't be interested in having liquidity in the property, isn't loaning money what they are there for? The bank has more liquidity in my portfolio than I do, by design. I would assume most folks want to leverage as much as possible.
I think the income is the real sticking point. Banks seem to care about income as their #1 qualification and not much else. I flat out asked the broker, if they had 10 MM in the bank and no income, could they get the loan? and he said without income, no they can't. I don't exactly understand that, as the lump sum in the bank is obviously more stable than a paycheck which could disappear based on any number of factors. What am I missing here, or did the broker not know what they were talking about?
thanks
John
- Investor · Palmetto, FL · Member since 2014 · 27 posts · 3 votes8y
Originally posted by @George Despotopoulos:
@John Barnes Another option would be a non-bank/specialty lender. Lenders that operate online and direct to your borrower (or broker-to-borrower). You mostly see ARMS in this space as well. The advantage is that it's underwritten as a commercial loan (it's basically asset-based lending) so the borrower's DTI does not come into play. The rates will be a little higher, 6.5% - 8.5% depending on LTV, FICO, their experience in owning a rental property. I've seen 7/1 ARMS, with 1-2 prepayment penalties, so these could be a solid option for your investors. It's much easier than dealing with a bank since everything is online and they're doing non-owner occupied loans, which means way less regulatory compliance issues.
Hey George,
This is helpful. Do you have any you suggest to start looking at?
thanks
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Greater than 40-45% of your income going to pay the monthly mortgage leaves very little money for anything else. This is especially true at lower income levels. 55-60% of $35,000 = $20,000 to live on...for the year. You're one hiccup away from disaster. DTI is not perfect but's it's their best indicator of repayment probability. For context, many landlords on BP use 30% of income for rental qualification approval (even lower than residential mortgage standards).
Chris has mentioned a good path. He's the resident expert on residential financing. Call around.
Commercial lenders will focus more on property NOI and less on DTI but they will take a holistic view.
- Investor · Palmetto, FL · Member since 2014 · 27 posts · 3 votes8y
Originally posted by @Mike Dymski:
Greater than 40-45% of your income going to pay the monthly mortgage leaves very little money for anything else. This is especially true at lower income levels. 55-60% of $35,000 = $20,000 to live on...for the year. You're one hiccup away from disaster. DTI is not perfect but's it's their best indicator of repayment probability.
Chris has mentioned a good path. He's the resident expert on residential financing. Call around.
Commercial lenders will focus more on property NOI and less on DTI but they will take a holistic view.
thanks Mike.
I totally get the DTI. What I don't exactly understand is, the bank is not taking their liquidity into consideration.
How is it safer to lend to someone making 50k a year with 25K in the bank rather than someone making 35K a year with 300K in the bank? The banks seem to prefer the 50K borrower over the 35K borrower, even though the 35K borrower could essentially be a 50K borrower for 20 years with income + spending down the liquidity.
That angle from the bank I am not understanding.
- 8yGeorge DespotopoulosBusiness MemberLender · New York, NY · Member since 2016 · 936 posts · 287 votes
Originally posted by @John Barnes:
Originally posted by @Mike Dymski:
Greater than 40-45% of your income going to pay the monthly mortgage leaves very little money for anything else. This is especially true at lower income levels. 55-60% of $35,000 = $20,000 to live on...for the year. You're one hiccup away from disaster. DTI is not perfect but's it's their best indicator of repayment probability.
Chris has mentioned a good path. He's the resident expert on residential financing. Call around.
Commercial lenders will focus more on property NOI and less on DTI but they will take a holistic view.
thanks Mike.
I totally get the DTI. What I don't exactly understand is, the bank is not taking their liquidity into consideration.
How is it safer to lend to someone making 50k a year with 25K in the bank rather than someone making 35K a year with 300K in the bank? The banks seem to prefer the 50K borrower over the 35K borrower, even though the 35K borrower could essentially be a 50K borrower for 20 years with income + spending down the liquidity.
That angle from the bank I am not understanding.
@John Barnes what you're talking about is an "asset dissipation" or "asset depletion" mortgage. Basically since the DTI doesn't fit the bank's loan program, they would have to use a different program where they try to see if the loan can be repaid by depleting the assets over time. This is usually a completely different lending program, and many banks might not offer it. Even if they do, as @Mike Dymski mentioned, your borrower's assets are not so high that it's a no-brainer for the bank, especially if the borrower has other debts they need to pay.
MoFin Lending4.9152 Reviews - Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Someone in the lending business will have to answer that question but it's likely because the 50K borrower performs better than the 35K borrower...illustrated by historic default statistics, rather than arbitrary preferences. When values decline or people loose their jobs or they have high vacancies or repairs, some will sell their other assets to make the mortgage payment but many will not...they just hand the keys over to the lender because they are upside down. Your assumption that everyone will use their liquidity to cover the shortfall is not valid.
Remember, this mortgage is only earning 5.625% for the lender. When you subtract the lenders cost of funds and their general and administrative expenses, their profit margin (before defaults) is thin...let's say 1-2% for conversations sake. That leaves very little room for any defaults and loan charge-offs.
Loose lending leads to the situation we had in 2008.
- Investor · Palmetto, FL · Member since 2014 · 27 posts · 3 votes8y
Originally posted by @Mike Dymski:
Someone in the lending business will have to answer that question but it's likely because the 50K borrower performs better than the 35K borrower...illustrated by historic default statistics, rather than arbitrary preferences. When values decline or people loose their jobs or they have high vacancies or repairs, some will sell their other assets to make the mortgage payment but many will not...they just hand the keys over to the lender because they are upside down. Your assumption that everyone will use their liquidity to cover the shortfall is not valid.
Remember, this mortgage is only earning 5.625% for the lender. When you subtract the lenders cost of funds and their general and administrative expenses, their profit margin (before defaults) is thin...let's say 1-2% for conversations sake. That leaves very little room for any defaults and loan charge-offs.
Loose lending leads to the situation we had in 2008.
Good answer, it must be based on historic default rates, or else the lenders would not be looking at it like this. It makes sense, there are certainly people smarter than myself working on the bank's risk side.
- Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes8y
@John Barnes A lot of lenders it is actually easier to count rental income before you have it on the tax returns because then they have to go by the Schedule E and especially if you have CAPEX up front, then it will appear you have poor income your first year, so that is why alot of banks just say 2 years because the second year is a better indicator of stabilized rents and expenses. Where as if you have a lease but not tax return filed, the bank typically will count anywhere from 50-75% of that income as a calculation because they don't have a Schedule E to work off of. I would go straight to asking the mortgage lender if they would count rental income from a rental property purchased same year. Get the cat out of the bag right away so it saves everybody time, and you can leverage that free time to make more dials. On average I can bang out 10-15 calls in an hour because I am very specific about what my ask is so I get a very specific answer.
- Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes8yA retired friend recently got a mortgage with very low income by setting up a monthly withdrawal from one of his IRA accounts. In your case, could probably be from a brokerage or whatever account. This them showed an extra $xx/mo income which satisfied their DTI requirement. After closing, the monthly withdrawal was stopped - no one cared at that point. :) All this was done above board of course, with everyone understanding it - nothing hidden.
- 8yDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
I was a bank lender for many years. Banks do have Federal Regulators breathing down their necks constantly and Regulators have loans that don't cash flow. Banks also are not hard money lenders and don't want to be foreclosing on property. It's not their business model. I was asked to write an article some time ago on this subject and I recalled advice that I got when I was a "baby lender" straight out of college. A mentor once told me that the three most important things in lending are Ability, Ability, and Ability. In other words, does the person have the cash flow to pay off the loan? You are going to have more luck looking for a private lender that will do a low Loan-to-Value loan secured by he real estate or the equities themselves. Many will actually hope they default in a quasi-real estate play. Good luck!
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