hard money and debt-to-income ratio questions

10 Replies

Hello BP, 

I have a question regarding hard money loans and the debt-to-income ratio. 

I want to use a hard money lender to purchase a medium-sized multi-family property for buy and hold purposes. After the rehab, I want to rent out the property and put conventional money on it, I assume the bank I get the new loan from would look at my debt to income ratio correct?

I make decent money ($70K per year) and I have two properties right now, my primary residence and a rental property. The banks tell me my debt to income ratio is maxed out.

How do I get around the debt-to-income ratio? I am trying to scale. I don't have a problem going to a hard money lender, but I am unsure about the refinance/ Debt-to-income ratio. 


Scott G

@Scott Goulet

What is the unit size you are looking at? Once you get to 5 units and up they should be looking at the operating income of the property itself and not at your personal financials. They will want to see them if you are personally guaranteeing the loan but your debt to income shouldn't even be that big of an issue. Most banks would be more concerned with your net worth (personal balance sheet) to see that you have equity to cover any short comings should they have to foreclose. If you go with hard money up front, it will be even easier. Then when you go to refi, you can show actual operating income under your management/ownership.

I hope this helped in some way. I would maybe start to look for a new bank that will finance based on the value of the asset not based on your income.

@Ryan Blake , That makes a lot of sense. So you think it could just be partly the bank I am asking? 

Also Ryan, lets say i was looking at a duplex,tri,quad, I know with these properties, they do look at your personal finances correct? So even if i use a hard-money lender to purchase and rehab, when I go to refi, could i even refi due to my debt to income? 

How did you get your start in real estate? I would love to get more involved/ transition from my job to starting a company or a brokerage myself. I am an agent, but i have not put a lot of effort into my realtor side of my license. 

thanks again! 

@Scott Goulet With 1-4 unit properties you would need to show adaquate debt to income whether refi or initial financing. This would stop that. Commercial loans (for more than 4 units) would not have this requirement. There are some lenders out there that will do portfolio loans for a refi based on the property preformance under 5 units but those are harder to find and will have a higher interest rate and higher loans to value ratio.

@Ryan Blake So it sounds like what you are saying is possibly to save up enough to get into a 5 or more unit multi. This way they aren't looking at my personal finances. With these type of properties there isn't anyway to put under 20% down correct? 

Hello Scott,

Your debt to income is not factored into approval when it comes to hard money lending. Your credit, experience and liquidity are the determining factors. When it comes time to refinance and you choose to refinance under conventional financing guidelines then your debt to income will come into play, however if this is an issue you can always refinance with an asset based lender. In this case the lender will not look at DTI, but will approve based on credit, cash flow, location of property and loan to value. "Where there is a will there is a way my friend"

@Scott Goulet you are getting mostly good advice here. 

What I would like to add is to echo what @Bob Green is saying..... There ARE lenders out there that will do 'portfolio' 'asset based' or commercial loans', what ever you want to call them, on 1 to 4 unit properties. 

We found ours at a local credit union. In my case, I hold properties both in my own name and with 2 partners in an LLC. With the LLC, these types of loans are our only option. Right now I am looking at adding a property in my own name and am debating whether to go commercial or conventional.

Advantages of commercial can be a quicker close, lower down payment, and lower closing costs. Disadvantages are only a 10 year lock in our case, a slightly higher interest rate.

On the deal I am working on right now we can get a rate of 5.125%, 20 percent down (that can come from our Private Money Investor) 25 year amortization with a 10 year lock on the rate and under 2K in closing costs. after year 10, the rate can go up only 1% a year and a max of 6%.

Dan Dietz

@Bob Green  Thanks for the information, could we setup a call sometime to speak about the specifics on these types of loans you are speaking about? I would like to move sooner than later on a multi-unit property and I will have cash flow from two rental properties and my credit score is about 780. Any Info would be greatly appreciated.

@Daniel Dietz When Approaching your Local Credit union about these types of loans, what specific questions would you be asking? Basically just if they offer a "portfolio loan" or if they do Asset based lending? that type of thing? 

@Scott Goulet   You should talk to @Melvin List - if your properties cash flow well you shouldn't have an issue adding another one as an investment. Basically if 75% of the rent can cover PITI it shouldn't increase your debt to income ratio. Is the lender you talked to counting expected rental income (or actual rental income if it's already going to be leased out when you refi)? I can't say whether your DTI is too high without seeing paperwork, but you can finance conventionally and count rental income. If you have a lot of other debt aside from your mortgages then maybe it is too high, but cash flowing investment properties shouldn't hurt your ratios.

@Scott Goulet these loans can go by many names, ours calls them 'commercial in house loans'. One of the main advantages is that they DO keep them 'in house' so play by a whole different set of rules than those that 'resell' like a traditional 30 year fixed loan. 

We actually had the option of doing one loan per property or put them all under one loan. We choose the one loan method last time, as our equity portion on that loan grows faster and can be tapped into a bit more easily than doing that on say 3 different properties. 

It can be hard to find longer than a 5 year fix on the rate, but just keep checking around. We found 10 years and a max of +6% after that. 

Dan Dietz