Having trouble refinancing using the BRRRR because of DTI
Rental Property Investor · Midland, MI · Member since 2016 · 76 posts · 31 votes
Having trouble refinancing using the BRRRR because of DTI
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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes@Jill Haselman @Vince Gethings @Stanley Parsley @Andrew Glenn I'm tagging everyone in this post because this is such an important topic. It's important to understand how to structure these transactions properly so you can keep the ball rolling. The theory here is that you should ALWAYS be able to afford an investment property. Since you only buy properties that cash flow, the rent covers the mortgage payment, and it's a wash (or better) on your DTI. In many cases your DTI will be BETTER after buying an investment property. However, how you structure this and the bank you work with is critical to this strategy.
Conventional loans are loans governed by Fannie Mae and Freddie Mac. Those loans allow you to not only use immediate rental income (with no experience or history) but they also allow forecasted rental income on a property you buy. You can literally buy a rental property that is empty and have the rental income counted towards you qualifying for the mortgage. Refinancing a property can also be without a renter but you must have an executed lease to count that income.
So why is the originator of this post having issues? The main reason is because the loans types that are being used in this post are commercial or portfolio loans. These loans fall outside of the conventional guidelines and are actually governed by the banks themselves. So we are held to their qualifying standards - which unfortunately don't allow rental income. And while these loans may sound similar in nature each bank will decide it's terms differently. Each and every bank will govern it's portfolio loans slightly different. With over 15,000 banks in America, it is possible to find portfolio loans that will qualify easier but it will take a lot of phone calls.
What is our solution? The solution is to find a conventional lender with no, or very limited overlays on their conventional lending. This might sound even more confusing but a bank can actually add extra rules on TOP OF Fannie/Freddie guidelines. If you have heard "we need 2 years of tax returns" or "Credit score needs to be 680" or "We need you to be on title for 12 months" those are all overlays. You can actually get a loan on 1 year of tax returns, go below 660 credit, and be on title for one day. The most common overlay that large banks have is only allowing 4 or 6 loans. But we know you can do 10. So find a bank with limited overlays and you won't have a DTI issue on your investment properties.
21 Replies
- Investor · Chandler, AZ · Member since 2015 · 409 posts · 214 votes9y
are the multiplexes in your LLC also
it may be that your LLC does not have its own line of credit or d&b number
if you are using your social for credit inquiries in your LLC then you do not have it set up correctly
once you have assets in your LLC you should be able to continue in purchases
the seasoning is a big game to some lenders so I would shop around more
enjoy
- Rental Property Investor · Midland, MI · Member since 2016 · 76 posts · 31 votes9y
Good question Stanley. No, the the Multi's are in my name. This BRRRR SFR was the first property I used with my LLC. The banks still wanted my personal info to back up the loan even though it's owned in my LLC. Does this not sound right?
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes9y
Hi @Vince Gethings,
You need to find a lender that is REI-friendly with minimal/no overlays. With a cashflow positive fourplex and duplex, I strongly doubt your DTI is an issue provided that it is being correctly calculated.
Fannie Mae has an entire section on how to include rental income in the mortgage math with "partial or no rental history on tax returns."
However, an LLC can not get a good 30YF mortgage, and that is not an overlay.
- Rental Property Investor · Midland, MI · Member since 2016 · 76 posts · 31 votes9y
Thanks @Chris Mason, it seems I wasn't asking the right questions when I was calling the lenders, which led to a lot of wasted time applying for refinancing. I figured my rental income would be counted toward my DTI if I provided the rent rolls and bank statements. I will refine my questions and loan criteria this weekend and hit the banks hard on Monday. I would love to by able to refinance this property by 1 June!
- Temple, TX · Member since 2016 · 43 posts · 11 votes9y
Vince, if possible, keep us updated on how this turns out. I would love to learn how you navigate this.
- Rental Property Investor · Midland, MI · Member since 2016 · 76 posts · 31 votes9y
Update: I called all nine of the local commercial lenders in my area. All of them enforced the 3-year income history (overlay) for my LLC, which I won't have for another 2 years. So it looks like my next best options are: 1) expand my search to equity based lenders outside of the local market 2) seek a bridge loan to get through these next 2-3 years until I can start counting my rental income on applications.
If anyone has a recommendation for lenders that will service a loan for this property please shoot me a PM, it will be much appreciated.
- Rental Property Investor · Midland, MI · Member since 2016 · 76 posts · 31 votes9y
Update: My realtor came by the house and suggested the ARV is about $10,000 higher than I originally estimated. So I am go to list it for a month or two to see if I can sell the property. If not my property manager is ready and standing by to rent it out. He gave me a lead on a portfolio lender in the area that will refinance the property if I still choose to go that route. I will post an update as things progress.
- Wholesaler · Myrtle Beach, SC · Member since 2017 · 276 posts · 80 votes9y
Hi @Vince Gethings If you are still looking for a possible solution and have questions then feel free to give me a shout. Thanks..
- 9yJill HaselmanPro MemberRental Property Investor · Delray Beach, FL · Member since 2015 · 63 posts · 41 votes
@Stanley Parsley I have almost an identical situation to the thread above, except much higher numbers in South Florida. Can you help me understand how best to set up my LLC as you suggested to @Vince Gethings? I have a LLC set up, but nothing done with it yet in terms of banking and structure. I've owned many investments but now moving toward a formal structure and business enterprise. Thanks in advance for any guidance.
- 9yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Jill Haselman @Vince Gethings @Stanley Parsley @Andrew Glenn I'm tagging everyone in this post because this is such an important topic. It's important to understand how to structure these transactions properly so you can keep the ball rolling. The theory here is that you should ALWAYS be able to afford an investment property. Since you only buy properties that cash flow, the rent covers the mortgage payment, and it's a wash (or better) on your DTI. In many cases your DTI will be BETTER after buying an investment property. However, how you structure this and the bank you work with is critical to this strategy.
Conventional loans are loans governed by Fannie Mae and Freddie Mac. Those loans allow you to not only use immediate rental income (with no experience or history) but they also allow forecasted rental income on a property you buy. You can literally buy a rental property that is empty and have the rental income counted towards you qualifying for the mortgage. Refinancing a property can also be without a renter but you must have an executed lease to count that income.
So why is the originator of this post having issues? The main reason is because the loans types that are being used in this post are commercial or portfolio loans. These loans fall outside of the conventional guidelines and are actually governed by the banks themselves. So we are held to their qualifying standards - which unfortunately don't allow rental income. And while these loans may sound similar in nature each bank will decide it's terms differently. Each and every bank will govern it's portfolio loans slightly different. With over 15,000 banks in America, it is possible to find portfolio loans that will qualify easier but it will take a lot of phone calls.
What is our solution? The solution is to find a conventional lender with no, or very limited overlays on their conventional lending. This might sound even more confusing but a bank can actually add extra rules on TOP OF Fannie/Freddie guidelines. If you have heard "we need 2 years of tax returns" or "Credit score needs to be 680" or "We need you to be on title for 12 months" those are all overlays. You can actually get a loan on 1 year of tax returns, go below 660 credit, and be on title for one day. The most common overlay that large banks have is only allowing 4 or 6 loans. But we know you can do 10. So find a bank with limited overlays and you won't have a DTI issue on your investment properties.
- 9yClint ShelleyPro MemberSurveyor · Dothan, AL · Member since 2014 · 425 posts · 391 votes
fantastic answers @andrewpostell
- Investor · Littleton, CO · Member since 2015 · 23 posts · 5 votes9y
Andrew, essentially you are saying the best way to go about this situation is to refinance the property through the OP's personal income? Would this not hold true for all residential investment properties? It seems having an LLC is counter productive to residential investing aside from the obvious liability one can be protected from.
- 9yJim BlackburnBusiness MemberLender · Florida Based (48 states Puerto Rico) · Member since 2017 · 321 posts · 121 votesVince Gethings You'll have to wait 6 months after taking out of LLC to go conventional. Ask Anything
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@Andrew Postell Thank you for the education; very helpful. Let me seek further clarification. Here's an example of what I'm dealing with. I bought and renovated a foreclosure (now primary residence) and I'm trying to do a refi cash out to recoup my $300K in cash I put in to the remodel. Quicken took me through 3 months of crap only to say my DTI was too high (purely mortgages!) and they only went off taxes for income (no track record, cash, or equity considered at all). Then I went to Guaranteed Rate through a friend and was assured they have more flexible guidelines. I have a downtown Chicago condo off Mag Mile that NETS $3K/mo, but it just started being rented since November (7 months). They won't count that income (despite signed leases and cashed rental checks) because it's 2017 income and not on my taxes yet. Seriously? Got approval, but then the appraiser told them a fence permit was still outstanding (he was wrong) and they got cold feet saying that I could be vulnerable to mechanics liens and/or my taxes could go up do to additional improvements I could do with an open permit/inspection. The inspection passed a year ago- he got incorrect information.
This is mind boggling to me and very frustrating, let alone a waste of time.
NEXT: I am going to make an offer on an investment property today for $750K and it needs $500K of renovations. Will be rental with mega cashflow. ARV will be north of $2M. I dread the financing game on this one.
ADVICE? Where do I find investor friendly lenders vs hard money without giving up another 3 months of time buried in paperwork? In addition to your counsel above, what should I be asking various banks to dig through this and find a lending partner once and for all?
Thanks!
- 9yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Jason H. @Vince Gethings you do NOT have to wait 6 months to go to a conventional loan. The gentleman's post above is an example of a lender overlay. Investors can refinance after being on title for 1 day. Refinances happen all the time with people being on title for 1 day. 100% guaranteed this is possible.
And Jason, LLC's do have a very important role in buying investing in real estate. It is better to receive a conventional loan up to 9 or 10 properties. Conventional loans have the best terms you can find so it actually makes you more profitable to have conventional loans. One of the important differences is that you will need to close in your name and then SWITCH title after closing to your LLC. That way you get the benefit of a conventional loan with the protection of the LLC.
Feel free to ask away if you have more questions.
- 9yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Jill Haselman your story is all too familiar. This happens to investors all the time. Super frustrating. Here's my comments:
Rental Income - Keep searching for a lender that will qualify you on rental income not on your tax returns. They are out there but they are likely not a national company. Do not be surprised if you make 50-100 calls to find good banks. Google the banks in your area and focus on the smaller to mid-sized banks. The banks you have possibly not heard of. The more successful you become the less you will need a bank and the more you will need a bank. It's a crazy dichotomy but get used to calling around. We all have been there. It is possible to find banks that will qualify your rental income if it is not on tax returns. They will use 75% of the rental income that is on the lease but is definitely helps.
Appraisal - this part sounds strange to me. I have had an appraiser flag for permits on a property before. We showed the permits and we closed. It sounds like something else was going on that they weren't admitting to but I could be wrong. Certainly sounds fishy.
Mega-Rental - this property sounds like it is a commercial property. If that's the case it is outside of my area of expertise. It might be better to ask in a different forum for advise on that property.
What should you be asking banks? - when you interview banks ask them about refinancing investment properties. Ask them about what their LTV is. Ask them on their seasoning requirements. Ask them about ARV numbers. How they treat hard money refinancing, LLC's, partnerships, etc. If the response is "I'll need to get back with you" - then go somewhere else. Your investment property expert should know these numbers to the tee. They should be able to advise you on how to structure your loans and be able to properly tell you their tolerances and overlays. It might be good for you to network in your area with other investors to see who they use or maybe even ask in some posts on BP "looking for lender in XXXX area". As I mentioned before you may have to call A LOT. Your profitability is dependent on having a good partner. Be patient and be thorough. Hope this helps!
Thanks!
- Leesburg, VA · Member since 2017 · 8 posts · 3 votes9y
I'll second @Andrew Postell on the LLC title waiting period being lender specific. We did a title change back to our personal names from our LLC to refi our rental and got it done a few weeks later. No issues at all.
- Rental Property Investor · Midland, MI · Member since 2016 · 76 posts · 31 votes9y
This has been a great thread, very informative.
Update on the subject property: We listed it, and got an offer within the first week, which we accepted. The net income, less tax bill, is about 7 years worth of rental income. If we close I'll be looking for either another flip if a I find a good deal or try to 1031 the profit into a duplex in the same market.
I have a duplex under contract now, but I'm not sure if it's too late to try and 1031 the profits from this house into the duplex...so that is the direction my research will go through the weekend.
- Investor · Sacramento, CA · Member since 2012 · 289 posts · 151 votes9y
Thanks for posting that link to the Fannie Mae guidelines.
https://www.fanniemae.com/content/guide/selling/b3...
This finally clears up for me how rental income is debt is calculated for DTI ratios. Obvious every bank can choose there method, but based on that webpage the math is:
Add up you monthly gross income, before income tax. (W2, ect). Don't include real estate income. This is income.
Add up all your monthly debt. (Car payments, student loans, primary residence mortgage, ect). This is debt.
Now for real estate:
Calculate monthly RENT mulitplied by .75. Then subtract all your monthly rental PITI (Principle, interest, tax, insurance. This is likely your mortgage amount). If the resulting number is positive (you're a little cash positive) add it to your income. If this number is negative. (You're a little cash negative) add it to your debt. Your mortgage payments are now accounted for, and don't affect debt in other ways.
So as long as you're roughly cash positive, buying rentals won't affect your DTI.
- 9yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Vince Gethings, as long as you haven't closed on the sale of your old property you're still in great shape to do a 1031. You can go into contract for your new property before you close the sale.
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