Brrr minnesota questions

[Ryan Hutton]

Hello everyone.

I’m hoping to get some sound advice.

I’ll try to keep it short and sweet.

I’m working on getting my credit score up. Currently at 563. Haven’t had credit in awhile, set up some lines of credit then screwed myself by setting up auto pay incorrectly.

I own a flooring business and am doing pretty well. I can come up with about $70k for a down payment.

Currently renting a house from my parents and they want me to buy it ASAP. Waiting for my score to get up enough where I can take out a loan...

I really want to get into BRRRR investing with multi family.

My questions are:

1.) Isit going to be hard to get a loan for an investment property if I’m paying a Morgage on our personal house?

2.) If I am able to get a loan for an investment property, and am able to put 20% down, assuming it appraise for more then what I put into it, would I be able to cash out and refi?

3.) what kind of credit score and income on paper do I need to show before doing ANYTHING?

Thank you I’m advance

[Evan Kraljic]

Here's what I would do, keeping in mind that I am not a mortgage lender and they should 100% be the person you contact in this situation. I know a few good ones including @Tim Swierczek who can lay out the plan best for you. With that being said, and sorry for going out of order here.

Question #3: If you're buying the home that you're renting from your parents that should be an FHA loan. Why? Lowest down payment required (3.5%) and lower credit score requirements. This article says you need minimum 580 to get eligibility for 3.5% down, but obviously you should shoot for higher than that as it can probably help your interest rate. I'll drop the link that I found the info.

https://gustancho.com/debt-to-....

Question #1: Back end debt to income limit of 50% max on conventional mortgages. It's actually 45% but can be raised to 50% with other compensating factors like a high credit score, which you don't have unfortunately.

https://mymortgageinsider.com/....

So if you buy your first mortgage as an owner occupant and you want to buy an investment property, then all your debts combined should not exceed 50% of gross income. What's nice about this is, I believe you can use 75% of rents to count as income. So as long as 75% of rents is higher than the PITI to the bank ($2000 rents on a $1500 mortgage), you should be fine at least from a DTI ratio. From an investor point of view, I'd want my debt coverage service ratio to be higher than 1.333 (1/0.75) anyways, but I digress.

Question #2: If you use a conventional loan it will have a minimum 6 month seasoning period where you cannot refi during that time. Unless you add significant equity it probably wouldn't make sense anyways, because a lot of cash out refis will be limited at 75% LTV (so 25% equity) and may have higher closing costs or interest rates on them (not sure on that as I haven't done one myself and am not in the mortgage biz, again talk to a lender). So you'd want to pull out a lot of cash to make it worth if you were on a conventional loan.

With that being said, the title of your post was BRRRR, which you typically aren't going to finance conventionally anyways. But that is totally counter to your question here where you mention putting down 20%, so I'm a little confused. Anyhow, I haven't done a BRRRR but based on my knowledge of it you'd typically finance the purchase with a hard money loan where all you are paying up front is closing costs on the loan (points and appraisal) to minimize your cash in the deal. They will lend based on after repair value and typically around 70% of that, so you want purchase and rehab to be all in at under 70% otherwise you're coming out of pocket to fund some repairs.

Terms will vary but I've heard 9 months before, so you'd want all renovations done and to refinance by that point to pay off the hard money loan. The downside to these is that you will be paying much higher interests rates (normally >10%) so you want to get in and out with the rehab as fast as possible, which I'd imagine can be difficult during COVID where supply chains are all sorts of messed up. 

I think you'll want to hammer down on the fundamentals before doing a higher risk deal like a BRRRR, especially in this market. Sorry for the novel, but I hope that helps some.