Will putting my properties in an LLC lower my DTI ratio?

Question

Hello,

I have two investment SFH but they are under my personal name. I was wondering - if I move one of the properties to an LLC, will that lower my personal DTI to allow me to refinance the one that is still under my personal?

Thank you in advance for your help.

River Sava · Answer

Hi Kelvin -

Have you looked into DSCR loans? No DTIs and LLCs are welcome as these loans are primarily underwritten based on the property not the individual.

Chris Seveney · Answer

@Kelvin He

No it will not as you are responsible for the debt.

If you refinanced into a DSCR with no recourse or another type of non recourse loan then you could remove them from your dti

Chris Mason · Answer

As others noted, moving ownership into an LLC alone will not do anything.

Once you have 3 or more, you can refinance them into a commercial blanket mortgage. Commercial mortgages made to an LLC do not appear on your personal credit, and typically have lower rates to boot. To keep the home loan people from getting confused, you will want to NOT report the rental income/expenses on your personal tax returns Schedule E, instead have the LLC do an S-Corp election, and report the income/expenses there (after confirming the truthiness of all this with your tax professional, of course).

Stacy Raskin · Answer

If the property is already reporting to your credit report, it will affect your DTI.

If you started and closed a rental property loan with an LLC, it may still be reported to your credit. Some lenders report to the credit bureaus for DSCR loans and some don't. If they report to the credit bureaus it will affect your DTI as your DTI is calculated based on what's on your credit report compared to your income. Most lenders sell their loans on the backend and some sell to different investors so they don't always know for certain who it will be sold to / if it will reported on your credit report as some report on the backend, some don't.

In case helpful, more info on DSCR loans: DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.Here's a bit more in detail about how rates are calculated for DSCR loans:1. Credit score- the higher the best. 780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.I've included an example below to help illustrate this.So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.See example below:DSCR < 1Principal + Interest = $1,700Taxes = $350, Insurance = $100, Association Dues = $50Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91Since the DSCR is 0.91, we know the expenses are greater than the income of the property.DSCR >1Principal + Interest = $1,500Taxes = $250, Insurance = $100, Association Dues = $25Total PITIA = $1875 Rent = $2300DSCR = Rent/PITIA = 2300/1875 = 1.23DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further.

Jake Baker · Answer

@Kelvin He

Some things to consider:

Transfer Taxes: Some jurisdictions impose transfer taxes when property ownership changes, even if it's to an LLC you own.

Due-on-Sale Clause: Check your current mortgage agreement for a due-on-sale clause, which might require you to pay off the mortgage if the property is transferred to an LLC. Uncommon but can happen.

Property Insurance: Ensure your insurance policies are updated to reflect the new ownership structure.

Chris is right that the current debt is tied to you so will need to refinance to improve your DTI. However, if you are cash flowing as a rental, it shouldn't hurt you too bad.

Will putting my properties in an LLC lower my DTI ratio?

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