Overcoming debt to income problem
Hey guys, I just did a full remodel on house and we are at the refinance step of the BRRRR. We also just sold our primary residence and paid off all of our debt except our rentals. The bank suggested waiting on the refi until we purchased our next primary residence. The banker called back today and said due to the debt to income ratio we would only be approved for about half of the purchase price we were looking to buy, that's also not including the refi on the remodel. My wife and I have good W2 jobs and our rentals do well but obviously we show a loss on taxes. Has anyone else dealt with this and is there any way around it? I appreciate the help.
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- SE Michigan
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#3 Buying & Selling Real Estate Contributor
- Rental Property Investor
- SE Michigan
Sounds like you are talking to a banker that may not be familiar with rental property.
When we had 14 SF rentals, I was trying to do a refi on our personal residence and none of the major banks would do it. One banker even told me it was illegal to have that many mortgages. Finally, I went to a mortgage broker that was experienced in loans to investors and we got it done.
You need to speak with a non QM lender for your refi. That will eliminate the DTI concern that you are facing
Yeah... you need to find a different lender. They have no idea what they are getting into.
Cheers!
Ask to get past the gate keeper - front loan guys or onto the next one. Local CUs preferably.
@Hunter Woolsey - I recommend finding a portfolio lender. These are typically local (not national) banks that lend their own money. Because it is their money, they do not need to meet Fannie Mae lending guidelines and are therefore more flexible. They will likely charge a little more in interest (around 1%) and origination fees but it is worth it.
My wife is a former financial advisor and she handles our loans/financing so I do not know a lot about that side of the fence, except for my RE reading/studies.
I focus on managing our properties/tenants.
I do know that our portfolio lender in Texas (shoot me a PM if you want the name) allows us to purchase our rentals under our LLC and these particular properties do not show up on our credit report - hence no impact on our Debt to Income Ratio.
The properties we have with traditional financing do impact our DTI.
As long as we have the cash reserves, 20% down and income to support the loans (plus an Appraisal Report with positive findings) we are good for another loan.
We do have to report every quarter showing rental status (occupied, not occupied) rent amount, Principal and Interest payments, Insurance and Property Taxes. The spreadsheet automatically calculates the DSCR (Debt Service Coverage Ratio) for each property.
I believe they want a minimum DSCR of 1.20 to do a loan on a property.
Over the years I've been able to move our DSCR average to 1.50 and soon to be 1.60 on our portfolio of properties. Most of this is from raising rents, but we also have refinanced a few properties back in March to lock in these historically low interest rates for 30 years, which reduced our monthly expenses and raised our DSCR since we took no cash out.
Hope this helps.
Ken :)
@Hunter Woolsey - I forgot to mention, I also have a mortgage broker in Dallas that has been very helpful with traditional financing, even with multiple mortgages on our credit report.
We used him to purchase two 4-plex properties last January. My wife says he is the first mortgage broker she has worked with who really understands the needs of RE investors (like the income on your tax return reflects the wonderful write offs the Federal Government provides to RE investors).
He will work to find ways to get you financed. If he cannot, I doubt anyone could.
Feel free to shoot me a PM if you (or anyone else) want his contact info.
Cheers,
Ken
Sorry to hear about your situation. You might want to double check the calcs. I had that problem many times. But, yes, many times your rentals will actually hurt your income when it comes to your dti. And that is even with backing out depreciation. Unfortunately, that is just the nature of the beast. Otherwise, you would need to find better deals.
Some might consider it "tax fraud" (and I'm not trying to advocate fraud), but you would claim less deductions on your return one year.. It may be an "incorrect" return, but its in the IRS' favor so I don't see how they could come after you.
Otherwise as mentioned, you need to use nonconforming loans to achieve what I think you want. If you like, I'd be happy to chat about your numbers privately, see if there was anyhting missed.
Good luck.
You are just not with the right lender. Are they using tax returns for the rental income?