Should I be worried about my DTI?

Question

Hi folks.

Just dipping my toes into the whole "private lender" thing.

Conventional lenders are not lending to me because the deal I'm considering will bring my DTI from 5p% to 53%.

Found a guy on BP who is fine with that DTI and ready to lend.

Question: is this too good to be true? If the banks dont want to lend, is there a good reason? If I push myself up to 53% am I putting myself at risk? What am I missing?

Some after deal financial basics:

Deal I'm considering will put me at 6 multi familys.

Total cash flow including w2 job will be $5900/month

$10k in reserves right now.

Thanks for any feedback

Kyle J. · Answer

@Jean-Paul E. Gagnon To answer your question about whether you should be worried about your DTI or not, I'd say yes, you should. Although some hard money lenders, and most private lenders, may not care about your DTI, you should be aware that those loans are generally short term and at some point you'll usually need to refi out of them. If your DTI is an issue for conventional lenders now, how will you refi out of that hard money/private loan in 12 months (or whenever it comes due)?

Point is, you need to be thinking about your exit strategy before you ever get into the hard money/private loan if you plan on keeping the property long term.

Also, one final note as a word of caution, be careful about who you meet online (even if it's on BP), especially if it seems to easy to qualify or "too good to be true".  There are a lot of scammers out there when it comes to hard money/private lending online.

Kyle J. · Answer

A few red flags to watch out for would be:

- Asking for a large loan application fee or other fees upfront

- Unusually low interest rates for a hard money/private lender (real hard money/private lenders aren’t loaning money at 4-5% but fake ones usually advertise those rates)

- Email communications with really bad English/grammar indicating the sender might be from out of the country

- Claiming they loan nationwide in all 50 states (most non-bank, hard money/private lenders operate in only certain states and don’t lend nationwide)

- Claiming they can do loans from $5,000 to $50 million (most lenders that will loan you $5,000 can’t do a loan for $50 million, and most lenders that can do a loan for $50 million aren’t going to bother doing a loan for $5,000)

- Offering to send you a photo of their drivers license (fake lenders tend do this to convince you they’re legit but I guarantee you it’s not their license they’re showing you and a real lender would never do this)

- Not caring about your qualifications or the merits of the deal (basically willing to “approve” you no matter what you bring to them since they know they’ll never actually fund it)

- Terms that seem just way too good to be true

That’s just a few things to watch out for. None of them alone guarantee the person/company you’re dealing with are a scammer, but if you see one or more of these red flags you should start to get suspicious and make sure you do your due diligence on them before sending any money or personal information.

Lastly, here’s some more info from BP on how to avoid these scammers that may give you some additional red flags to watch out for:

Tips for Avoiding a Scam on BiggerPockets

Jean-Paul E. Gagnon · Answer

@Tom S.

Thanks Tom. I'll follow up with those lenders. I see you're from my area. Can I buy you lunch some time?

Tom S. · Answer

@Jean-Paul E. Gagnon  Gives me an excuse to fly back 4 times per year to check properties and visit family and friends.  And I can write it off too! ;)

Jean-Paul E. Gagnon · Answer

@Tom S.

Ahhh...sounds like I found a motivated seller! ;-]

Only half kidding.  Got anything you want to get rid of??!!

Tom S. · Answer

@Jean-Paul E. Gagnon  I appreciate the offer but although I invest in VT as I'm from there originally, I live in CA now.

Odie Ayaga · Answer

@Jean-Paul E. Gagnon unfortunately Vermont is one of the states a lot of nationwide lenders don't lend to

Tom S. · Answer

@Jean-Paul E. Gagnon  I recall in the past I worked with one "nationwide" HML that gave me a quote. However, I ended up not proceeding because I got a better quote from a local bank in the area.  Have you tried calling Merchants, Northfield, Union, or Bar Harbor banks?  They're all fairly local.

Jean-Paul E. Gagnon · Answer

@Odie Ayaga

You mentioned 4 to 6 states where HM lenders dont operate.  Is my state (Vermont) one of them? Just had a deal fall through because a rookie lender discovered last minute that they cant do business here.  I'm wondering if I can expect to hit this roadblock every time I contact a HM lender.

Max T. · Answer

Your DTI should improve with the purchase of a good deal, not get worse.

Yes you are taking on more debt, but you should be taking on even more income at the same time.

Should I be worried about my DTI?

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