Financing a Currently Leased Property

17 Replies

I am looking to acquire my first property. My personal finances look to qualify me for around $125k. I have about $7k to work with for a down payment. I live in Kansas City, MO and am looking to buy in the area as I would be occupying the property. 

My question is if there are tenants in place in say a four unit, will the loan officer take the rental income into consideration when deciding how much I qualify for? What about potential rental income? Maybe there's a four unit with 2 tenants in place, could I qualify for more than $125k? I'm seeing a few properties in my area that are just out of my price range personally, but when considering the rental income, the math works out. Could I qualify for closer to $200K with the rental income included? 

I've only started working with my local bank and credit unions. Would a portfolio lender be a better option? 

Any advice is appreciated. 

First, I'm a broker, not a lender, and I could be wrong, or just lying, but here is my understanding of an FHA multifamily owner-occupied.

You can apply 75% of current rental income to your income to qualify for an FHA loan, but lenders can have different overlays that will affect this number. I would recommend finding a lender who is experienced with FHA multifamily owner-occupied. Good luck.

Originally posted by @Derek Hammond :

I am looking to acquire my first property. My personal finances look to qualify me for around $125k. I have about $7k to work with for a down payment. I live in Kansas City, MO and am looking to buy in the area as I would be occupying the property. 

My question is if there are tenants in place in say a four unit, will the loan officer take the rental income into consideration when deciding how much I qualify for? What about potential rental income? Maybe there's a four unit with 2 tenants in place, could I qualify for more than $125k? I'm seeing a few properties in my area that are just out of my price range personally, but when considering the rental income, the math works out. Could I qualify for closer to $200K with the rental income included? 

I've only started working with my local bank and credit unions. Would a portfolio lender be a better option? 

Any advice is appreciated. 

 Yes, you can use 75% of the rental income to qualify.

Stephanie

Thanks, @Matt Pritchard ! I appreciate it. 

Out of curiosity, have you or has anyone here had experience with lenders that allow the rental income to be considered income? I've seen the 75% rule vouched for here a lot, but the local lenders that I have spoken with tell me that the rule exists, but that most lenders require 1yr of rental income history for it to be considered. I'm assuming these are the overlays that others have talked about. 

I've only talked to local credit unions and banks. Am I looking for financing in the wrong place? 

Where do you find lenders that like to play it a little fast and loose?

@Stephanie P. , thank you for the clear response. This helped during my conversations with the few lenders I've spoken to. In regard to the above, do you have any tips or pointers in locating a good lender for my situation. Is paying a broker a good idea? 

First time home buyer, around $7-10K as down payment. I personally can "afford" houses in the $130K range, but I'm shooting/wanting properties that are closer to $250K that have tenants in place that cover the rent twofold even after I move in. <-- How do I pull this off?

@Matt Shields thanks for the input, man. This helped me out. I know you can't help but be biased, but in your opinion, would a broker be a good option for me? Is a lowly citizen simply so disconnected to the point that they're unable to find the lenders that would consider a situation like the one above?  

@Derek Hammond I'm not sure honestly. I prefer SFR in areas I can sell to owner occupants later on down the road. So my bank financing is super easy to get. I'd be happy to make a connection with my lender, he's about as aggressive/creative as you are going to find anywhere.

@Matt Pritchard I gotcha, no worries!  But I'm definitely looking for a creative lender. It couldn't hurt to have a convo with them. Shoot me a p/m or email with their info if you get a chance. I'll let you know if I have any luck! Appreciate all the help, man!

We are talking about a "real estate" broker and not a "mortgage" broker? Although, you need both. If you are just starting out, a broker/agent should be part of your team. They not only can assist you with sources for lending but also every aspect of acquisition and disposition of property. While legally they may be able to represent you, not all agents are qualified for income property. It is important to find an agent with rental experience, and preferably an investor themselves. Another good thing about working with real estate professionals when you're just starting out with limited funds is that most don't charge anything upfront for their advice/information and only get paid if you purchase something.

BTW I grew up in KC, hope all is well there.

Exactly the sort of advice I'm looking for, @Matt Shields ! Thank you so much for taking the time. I really appreciate it. 

And I'm glad you specified. I was thinking 'mortgage' broker. I do not have an agent yet, so I'll start checking around. Any tips on finding a qualified agent/broker for someone fairly new to the game? 

If anyone can recommend someone in the KC area, please send me their info! 

@Derek Hammond- From a Private Portfolio Lending perspective, and specific to Rental Loan qualifications, we use a DSCR (debt service coverage ratio) of 1:1-meaning, we do NOT qualify Income. We simply use the lease agreement amount. If it the lease amount exceeds the PITIA cost of housing, confirmed with the 1007 Addendum from the Appraisal, it would qualify as your income. SFR-75% MAX for Cash-out and 85% For Purchase and Rate/Term w/ 740+ FIco in most states.

Basic Documentation requirements;

*Our (2) page property and Credit application

*Bona-fide Lease agreement

*Hazard Declaration coverage

*(60) days Bank statements to cover 3 mo. Reserve requirement.

*NO Paystub's/W2's/1040's/1120's/Profit and Loss/Schedule E's etc.

*NO application fee's

*2-3 Week funding windows

Feel free to contact me with any questions.

Start hanging out where the investors are. Local REIA, multifamily, and BP meetings are a good start for referrals but be cautious of nefarious gurus. (Stand up and yell to your neighbor "I can do it!" now get out your credit card for my boot camp.) You will soon learn what this means. Call agents who have income property listed even if it's not really what you are looking for because they may know of other off-market deals. Ask them to put you on their e-mailing lists. If agents don't return your calls promptly and are difficult to get ahold of, scratch them off the list, you just avoided a bad agent. If you find a helpful and knowledgeable agent that you are comfortable with you may want to hire them as a buyers agent.

You also need to find a lender and get pre-qualified. This will bring you credibility when working with sellers and real estate professionals. Good luck!

thanks @Ed B.! This was super detailed and very interesting. I'd be curious of rates of private lenders vs commercial lenders. I really appreciate you taking the time to respond in such depth. I may reach out in the future. Thanks so much, dude! 

@Matt Shields Solid advice, man. I like your style. And I know exactly what you mean regarding the 'gurus' and their tricks. It's a racket for sure. I like the advice of getting in touch with an agent. I hadn't really considered them an asset until you put it in that perspective. Finding a lender/getting pre-qual are next steps.  I've gotten a ton of good info from a lot of folks here, so I hope to put that knowledge to work in the coming weeks. Thanks again for taking the time! 

@Matt Pritchard sounds good! I plan to start fairly soon, so I'll shoot you a message when I've gotten the ball rolling! I really appreciate it. Thanks, man!

The 75% of gross rental income is correct.  The guidelines allow for this based on either current lease agreements, or, for vacant units, you can request as part of your appraisal a 1007 rent comparison schedule where the appraiser, in addition to determining the value of the property, will complete a 1007 form which basically determines what the vacant unit(s) would rent for based on market comparables.  So if the 1007 says that a particular unit should rent for $1000/month, then you can count 75% of that, even if the unit is vacant.  Key is to find a lender to go with follow the guidelines without overlays.  Generally speaking, your best bet is to search for wholesale lenders (i.e. brokers) as opposed to banks as wholesale lenders exist purely to lend money and nothing else, so as long as it meets the minimum guidelines and its insurable and sellable, then that's all they care about.  Banks tend to be a bit more conservative because they can afford to be since they have other sources of income other than mortgage lending.  This isn't always the case obviously, but generally speaking, a wholesale lender might be your best bet for this situation.  Obviously referrals for a good one are highly valuable. 

 One thing to note is that any income being counted from rent is NOT netted against the proposed mortgage payment.  It is added to your total overall income.  So if you make $3000/month gross and the property rents for $1000/month, they will add $750 to your gross income for a total of $3750.  This will be the total gross income they use to determine your debt ratio against the full proposed mortgage payment and your other current monthly obligated debts.  May not seem like there's a difference, but there is as adding the rent to your income gives you a higher debt ratio (i.e. more conservative) than netting it off the proposed mortgage payment.  Doesn't really matter if you are well qualified, but if you are right up against the limits and you or your loan officer is doing it the wrong way, then it can cause a problem where you are thinking you qualify and you actually don't.  Just keep that in mind. 

@James Zettelmeyer ! my man! This was so helpful! I've been considering reaching out to a wholesaler/broker, but I think you may have sold me. At the very least, I now have a fairly good idea on what to expect and what terminology to use when having conversations with potential lenders. Thank you so much for taking the time, dude! 

ps. i'm a forum nerd, but BP is like nothing I've seen before when it comes to honest and genuine information being shared. Thank you to everyone for being so willing to spend their time replying to this thread. Can't thank you all enough! 

ha no prob.  A good broker will take the time to explain this stuff to you.  They should ask for, and collect, ALL of your financials and thoroughly review them before they issue you a pre-approval letter.  If you call a broker and he spends ten minutes on the phone with you and says your approved, don't waste your time.  You should walk away from your initial conversation with a broker with a greater understanding and knowledge on what the expect from your loan process and lending in general.  The good ones will take the time to do that.  Good luck!