Cash Out Refinancing + Debt to Income for next property

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Cash Out Refinancing + Debt to Income for next property

Eric Wiinanen
Rental Property Investor · Navarre, FL · Member since 2019 · 15 posts · 1 vote

Need a little advice from some seasoned investors.

We are in the process of refinancing our primary residence and should have about $70k to use towards purchasing another single family house to rent out - using it as the 20% down payment.

In our current refinancing, we are pushing our maximum for DTI ratio.

With purchasing the next house, will an underwriter use the potential rent income as Income?  What is the process to do that since there wouldn't be any current lease, past rent history, etc.?  How would you approach this?

Thanks!!

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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
5y

@Eric Wiinanen I will give you the answer here but keep in mind I won't be your lender....so you'll really need to speak to your lender on this. I am saying it like this because some lenders WON'T use rental income to help you qualify. And it also depends on what loan type you are using, if you are purchasing vs. refinancing (with the BRRRR method for example), etc. So we really need to make this a part of our questions that we ask our lenders. So make sure you are asking the following questions to any potential lender that you work with:

Questions for Lenders

  1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
  2. When do you start using “After Repair Value” on my property? (also needs to be immediately)
  3. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
  4. What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
  5. How many loans can I have with you?
  6. Can I change title to my LLC?
  7. Do you sell your mortgages?
  8. What is your loan minimum?
  9. Can you explain to me what your reserve requirements are?

Feel free to ask anything additional that you might need. Thanks!

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  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    5y

    @Eric Wiinanen I will give you the answer here but keep in mind I won't be your lender....so you'll really need to speak to your lender on this. I am saying it like this because some lenders WON'T use rental income to help you qualify. And it also depends on what loan type you are using, if you are purchasing vs. refinancing (with the BRRRR method for example), etc. So we really need to make this a part of our questions that we ask our lenders. So make sure you are asking the following questions to any potential lender that you work with:

    Questions for Lenders

    1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
    2. When do you start using “After Repair Value” on my property? (also needs to be immediately)
    3. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
    4. What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
    5. How many loans can I have with you?
    6. Can I change title to my LLC?
    7. Do you sell your mortgages?
    8. What is your loan minimum?
    9. Can you explain to me what your reserve requirements are?

    Feel free to ask anything additional that you might need. Thanks!

    1Reply
  • Nick BelskyBusiness Member
    Residential and Commercial Broker · Member since 2021 · 1k+ posts · 704 votes
    5y

    @Eric Wiinanen

    Using a DSCR loan to purchase the investment gets you away from DTi all together. The lender will look at the appraisal to determine fair market value and debt service coverage ratios to determine the qualify of the investment. They don't use your income, DTI, or work history to make a loan.

    I am almost open in FL, but not yet.  Any day now!

    Nick Belsky

    [email protected]
    Belsky Mortgage, LLC522 Reviews
    WebsiteView Page
    1Reply
  • Eric Wiinanen
    OP
    Rental Property Investor · Navarre, FL · Member since 2019 · 15 posts · 1 vote
    5y

    @Andrew Postell 

    Thanks for the list of questions to ask!  That will help us find the right lender!

    0Reply
  • George DespotopoulosBusiness Member
    Lender · New York, NY · Member since 2016 · 936 posts · 287 votes
    5y

    Hi @Eric Wiinanen

    With purchasing the next house, will an underwriter use the potential rent income as Income? Given that you're not meeting the DTI ratio, a non-bank lender that looks at the property's cash-flow (based on the market rent) is the way to go. The difference between this type of lender/loan product and a bank will be in process, underwriting requirements, rates, and fees -- so basically everything except that you'll be able to get a 30 year fixed. So to answer your question, yes, this lender will use the potential rental income. They will figure out what the DSCR (debt service coverage ratio) is on the property. That's achieved by taking the Gross Monthly Rent divided by the monthly loan payment of principal, interest, taxes, and insurance (as well as any dues). The gross monthly rent is provided to the lender by the appraiser. They will do a market rent analysis to determine what the monthly rent for the property you're buying is.

    What is the process to do that since there wouldn't be any current lease, past rent history, etc.? How would you approach this? I answered that above. But, again, if there's no lease that should not be a problem. When the lender orders the appraisal, they'll request an additional form from the appraiser, which is the market rent analysis. The appraiser will get comps for both the value of the home (sales comps) and the market rent (rental comps). When you start looking at properties, you'll have an idea of what you expect it to rent for (based on other similar listings in the area). You'll get that to the lender you're looking to get a quote from. 

    You can reach out to any non-bank lender (DSCR lender, property cash-flow lender) and informally run through a scenario. They'll be able to provide you with a quote pretty quickly. 

    MoFin Lending4.9152 Reviews
    WebsiteView Page
    1Reply
  • Eric Wiinanen
    OP
    Rental Property Investor · Navarre, FL · Member since 2019 · 15 posts · 1 vote
    5y

    @George Despotopoulos

    Thanks for the info! That makes a lot of sense!

    1Reply
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