Purchasing a rental property, bank won’t grant loan due to income

[Ashley Marrazzo]

Hey everyone! 

My name is Ashley and I am a first time home buyer. I am looking to purchase a duplex or triplex. But they told me no! I refuse to hear that as an answer! 

I was Approved for an 800k loan at 3.5%. I have Excellent credit (800+)BUT my student loan debt to income ratio is 52%. I make 48k a year and have 77k in debt. Looking to put about 30k down. I also have ZERO expenses every month (other than student loan). 

They said that if I were to purchase a place I would be unable to afford it due to my income if a tenet were to leave or something were to come up. They also told me i had to have an additional 50k in my bank account for reserve funds. 

What are my different options??

do I put More money down does that change? What if I did a conventional loan with 5% down? Why do they say you only need to put 3.5% down but then need to have double that in reserve? Do I need To save up more money?

how can I make It possible to buy a property with my current situation!

thank you everyone! 

[Lorenzo Prieto]

Hey Ashley, lets talk. I've seen this sort of scenario play out before and I was able to help. Are you on a income based repayment plan w/your student loans? I'll shoot you a DM to gather some more info.  

[Trevor Alexander]

Is this lender the one that pre-approved you for $800K and are now saying you aren't pre-approved?

Here's where I'm confused....to be approved for an $800,000 loan, you'd need approx. $12,000 in monthly gross income. You make $4,000 and would need another $8,000 in projected market rents from the multi-unit...something's not adding up.

Other notes:

First, you can only purchase a multi-unit for as low as 3.5% down with an FHA loan. A conventional loan would require 25% down.

Second, make sure your lender is utilizing the projected market rents from the unoccupied units. This counts towards your qualifying income.

Third, FHA's DU system will give an automated approve/eligible for someone with 800 credit up to 56.9% DTI. So, even the 52% DTI ratio they are telling you would still allow you to qualify.

4th, if student loans are in deferment make sure the lender is using .5% of total balance to calculate the payment and not the old formula of 1% total balance.

Lastly, FHA requires a self-sufficiency test for 3-4 unit purchases, which is a calculation to ensure worst case scenario all rents from all units (including yours) can cover the PITI payment. This won't show up on the automated underwriting system anywhere, and a Lender that didn't plan and calculate this ahead of time could be in for a rude awakening once the appraisal comes in and there's not enough rents to cover the PITI.

[Brian Blosser]

Is the 52% DTI including the house payment or are your student loan payments $2,080/mo? If that's the case then I don't see how you'll afford a house, assuming 20% (FUTA plus Feds) in taxes you only have ~$1,120 left each month. Not sure how you're living on zero expenses, but I would take my $30K, keep living with zero expenses for another year, and just get rid of the student loans, then buy a house.

[Sergey A. Petrov]

Lots of things that aren’t adding up… an $800k mortgage on $48k income with roughly $25k going to student loans. That leaves you with $23k in gross income and much much less than that going into your pocket after taxes… something is off here

[Ashley Marrazzo]

Quote from @Trevor Alexander:

Is this lender the one that pre-approved you for $800K and are now saying you aren't pre-approved?

Here's where I'm confused....to be approved for an $800,000 loan, you'd need approx. $12,000 in monthly gross income. You make $4,000 and would need another $8,000 in projected market rents from the multi-unit...something's not adding up.

Other notes:

First, you can only purchase a multi-unit for as low as 3.5% down with an FHA loan. A conventional loan would require 25% down.

Second, make sure your lender is utilizing the projected market rents from the unoccupied units. This counts towards your qualifying income.

Third, FHA's DU system will give an automated approve/eligible for someone with 800 credit up to 56.9% DTI. So, even the 52% DTI ratio they are telling you would still allow you to qualify.

4th, if student loans are in deferment make sure the lender is using .5% of total balance to calculate the payment and not the old formula of 1% total balance.

Lastly, FHA requires a self-sufficiency test for 3-4 unit purchases, which is a calculation to ensure worst case scenario all rents from all units (including yours) can cover the PITI payment. This won't show up on the automated underwriting system anywhere, and a Lender that didn't plan and calculate this ahead of time could be in for a rude awakening once the appraisal comes in and there's not enough rents to cover the PITI.

 So they said I was Pre approved for the 800k , I went house hunting found one I liked the the lender then said that all the numbers weren’t going to work with the property I wanted. Then told me in general because of my income it wasn’t going to work. 

Right now I have No information on my student loans because they are in deferment. So I have No monthly payment, I also Am unable to see what I need To be paying or if I’m able to consolidate them until the deferment period is over. 

I will ask about current market rent rates!

thank you for the advice!! 

[Ashley Marrazzo]

Quote from @Brian Blosser:

Is the 52% DTI including the house payment or are your student loan payments $2,080/mo? If that's the case then I don't see how you'll afford a house, assuming 20% (FUTA plus Feds) in taxes you only have ~$1,120 left each month. Not sure how you're living on zero expenses, but I would take my $30K, keep living with zero expenses for another year, and just get rid of the student loans, then buy a house.

Hello!

so I live/work on a boat, this is how all my monthly expenses are covered. Didn’t want to use all the money I saved Up to pay my student loans when I could Put that money towards a down payment and then have the rental property pay my loans long term. This way I can Continue to save my income towards more property. 

my loans are also in deferment so I dont Technically have to pay them until December 2022

[Trevor Alexander]

Quote from @Ashley Marrazzo:

Quote from @Trevor Alexander:

Is this lender the one that pre-approved you for $800K and are now saying you aren't pre-approved?

Here's where I'm confused....to be approved for an $800,000 loan, you'd need approx. $12,000 in monthly gross income. You make $4,000 and would need another $8,000 in projected market rents from the multi-unit...something's not adding up.

Other notes:

First, you can only purchase a multi-unit for as low as 3.5% down with an FHA loan. A conventional loan would require 25% down.

Second, make sure your lender is utilizing the projected market rents from the unoccupied units. This counts towards your qualifying income.

Third, FHA's DU system will give an automated approve/eligible for someone with 800 credit up to 56.9% DTI. So, even the 52% DTI ratio they are telling you would still allow you to qualify.

4th, if student loans are in deferment make sure the lender is using .5% of total balance to calculate the payment and not the old formula of 1% total balance.

Lastly, FHA requires a self-sufficiency test for 3-4 unit purchases, which is a calculation to ensure worst case scenario all rents from all units (including yours) can cover the PITI payment. This won't show up on the automated underwriting system anywhere, and a Lender that didn't plan and calculate this ahead of time could be in for a rude awakening once the appraisal comes in and there's not enough rents to cover the PITI.

 So they said I was Pre approved for the 800k , I went house hunting found one I liked the the lender then said that all the numbers weren’t going to work with the property I wanted. Then told me in general because of my income it wasn’t going to work. 

Right now I have No information on my student loans because they are in deferment. So I have No monthly payment, I also Am unable to see what I need To be paying or if I’m able to consolidate them until the deferment period is over. 

I will ask about current market rent rates!

thank you for the advice!! 

If student loans are in deferment, the Lender will default to .5% of total balance; in your case, that's $385 per month. I'm still not tracking how you are approved for $800,000 with $30,000 down. That's a $770,000 loan amount and a P/I payment of approx. $4,400-$4,600 per month. Once you add in FHA MI, property taxes, and HOI, you are looking at over $5,000 per month mortgage payment. Is there other income on the file in addition to your $48k per year? Even at $2,500 rents per unit, that's $9K per month in income when you'll need at least $12K of income per month to make the DTI ratios fit.

[David M.]

@Ashley Marrazzo

It really does sound like your lender bs'ed you with that 800k pre-approval.  find another lender --- pm if you want a referral of mine (BP forum rules prevent us from openly giving referrals).

Help yourself with some of the math..  For example, from an amortization table $100k loan @ 6% for 30yr is $600/mo.  The payment scales with the size of the loan so $200k loan is $1200/mo.  While you have "next to no living expenses" since you live on a boat, they still can't loan you your entire salary.  But, even if they did, it wouldn't get to $800k (even if you used your gross salary and avoided federal income tax, just for illustration).  Also, you still have to pay home insurance and taxes.

With a mult-family, additional purchasing power comes along with the expected rent schedule (which is calc'ed for loan purposes at 75%). FHA does have rules about additional calculations that they have to make which assumes the loss of a unit's rent. Basically, they want to make sure you can still make the payments when you have a vacancy. So, there are more than one calculations limiting your purchasing power.

LIke I said, get a proper lender.  If you want to chat, I'd be happy.  Just send me a message if you are interested.  Good luck.

[Eliott Elias]

If the income it’s producing doesn’t cover the monthly mortgage payment they won’t give the loan. I’d look into putting more down to have it cash flow 

[JD Martin]

Whether you get approved or don't get approved, this sounds like a foreclosure in the making. You'd have no reserves and not enough income (even if you stayed on the boat) to make your payments if you weren't 100% occupied all the time. 

Sad to say, but these are the kinds of loans that were being given out in 2004-2006 just before everything went to hell. You'd have virtually no skin in the game and no real incentive to kill it to keep the property. The safest route is get your loans paid off first and go from there. 

[Theresa Harris]

Talk to the bank. If you put more money down, then the amount of your loan would be lower and that may work better with your DTI ratio. I'm not sure how you have no expenses other than the student load as you need a place to live and you need to eat, etc. I can't see a lender loaning you $800K on a $48K income. If you were preapproved for $800K, how much was the place you were going to buy and the bank said no to?

Options: talk to another lender, look for a less expensive house, wait until you can save up more money.

[Dan DiFilippo]

@Ashley Marrazzo I think you need some more subject education before you pull this trigger.

Please check out "The Money Guy Show". It's a couple of financial advisors who have a YouTube show podcast. Bright guys, very personable. They give very accessible and helpful lessons on personal finance on wealth-building. And it's very much geared toward the average person. They have something they called the "financial order of operations" which they describe as the various capital allocations you should make as you accumulate wealth. The first operation is establish an emergency fund. Three to six months of living expenses in cash. Essentially, if you're not drowning in debt, you need to be holding this cash to keep your life from falling apart in an emergency. From there, you can build higher, start to pay off certain debts, establish the incentivized investments (benefits IRA's, HSA's, etc.), then look for the other investments.

Not to be rude, but it's not clear to me that you have any of this worked out. I'd be worried that you're so mortgaged up to the hilt, that one single bump would cause you to lose your entire arrangement. For example, what happens if the HVAC needs to be replaced this winter, so your tenant withholds rent and begins to constructively evict. Well, now your $6-10k HVAC problem just caused you to lose your property and you have a deficiency judgment against you.

I tend to tell people, unless you're making about $65k, you don't need to worry about investing in real estate. Now, that isn't without its exceptions, but the point isn't for you to insist you're one of them.

People get emotional in this business and make some extremely poor decisions. I took on a client once who told me he was making about $30-35k in his new role at his job (not yet established/secure in it). He asked me to find him a multi. He said it could've been a 3 unit, but that he really wanted it to be 4 unit (so around $250-300k). He was going to buy with his VA loan (no money down, thereby incurring a funding fee). AND he had just overpaid for his present home a year before AND he did that with 100% VA financing (again, funding fee) AND he'd helped himself to COVID forbearance. I'm pretty sure he did actually understand that the forbearance only deferred payments, but his explanation of it to me was "if the government wants to offer me money, I'm going to take it."

Needless to say, he did not go on to buy a four plex. But he did not go on to not do it before asking me about a hard money alternative for acquisition financing. As if he would somehow be able to carry at a 10% interest rate.

And I don't mean to make the case that you're making this poor of a decision, but it does sound a bit to me like you're caught up in the stories that get shared around on places like this website.

[Bob Reinhard]

Without reading everyone's comments, your application should include the income that you will receive from the rental as your income, because it will be.
Much success.

[Jonathan R McLaughlin]

@Ashley Marrazzo used to crew and run boats so rooting for you. There are actually some properties where this could maaaybe work on paper, high rents (2700+) and roommates etc but I have to agree with @JD Martin here it’s too big a bite at the apple.

But see what happens at the 350k-500K level for a multi. Might be able to make that work and still get all the benefits. Also, triplex’s are a lot like boats…the mortgage is just the entry fee. Lots of capex and need for reserves.

[Michael Key]

Quote from @Ashley Marrazzo:

Hey everyone! 

My name is Ashley and I am a first time home buyer. I am looking to purchase a duplex or triplex. But they told me no! I refuse to hear that as an answer! 

I was Approved for an 800k loan at 3.5%. I have Excellent credit (800+)BUT my student loan debt to income ratio is 52%. I make 48k a year and have 77k in debt. Looking to put about 30k down. I also have ZERO expenses every month (other than student loan). 

They said that if I were to purchase a place I would be unable to afford it due to my income if a tenet were to leave or something were to come up. They also told me i had to have an additional 50k in my bank account for reserve funds. 

What are my different options??

do I put More money down does that change? What if I did a conventional loan with 5% down? Why do they say you only need to put 3.5% down but then need to have double that in reserve? Do I need To save up more money?

how can I make It possible to buy a property with my current situation!

thank you everyone! 

 They gave you a pre-approval based on whatever limited info you filled out when you applied for it. Sometimes pre-approval can be more or less than the actual amount. It allows you to shop with a realtor.

But it will always change once they dig into your finances. Since it's 800k and not 20% down, then it's a JUMBO loan which has different lending requirements. Such as you needing to have reserves. If you have a 401k or brokerage, that can also be used. If you have a relative with a significant amount, ask if they can put you on that account. It's only used to prove you have access to such funds.

Something to consider would be trying to find another property, or seller finance where the barrier to entry won't involve a bank.

[Craig Janet]

You're trying to finance almost a million dollars with a 48K salary and no assets. You either need to come up with a huge chunk of cash or lower your property criteria. 

[Ashley Marrazzo]

@Michael Key @Jonathan R McLaughlin @Bob Reinhard @JD Martin @Theresa Harris @Bob Reinhard Hey everyone! Thank you for all the responses and the advice. I have reached out to my lender and asked him to use the new student loan formula based on the deferment at .5%, as well as use the new projected market rent rates towards my income. My partner and I are going to do this together, unfortunately because of his credit he cant be on the loan yet, hence why i was trying to get a loan in just my name. Seems like the most logically way would be to wait until his credit is fixed so that i can include his income, we would have to wait another 6 months if not longer, we can save up more money in the mean time. Our gross income together is 120K, Still will only have my student loan debt, but higher income, there is also the chance that his credit still wont be great combined with mine. 

Thanks again for everyones input im so glad that i have access to a resource like this and all your creative minds!

[Dave Skow]

@Ashley Marrazzo 1) your max debt / income ratio will be in the 45-50% range 2) if buying as a primary residence - you can but as little as 3.5% down using a FHA loan 3) FHA loans have a large upfront mortgage ins premium of 1.75% that you can roll into the new loan and the monthly insurance is high and is permannet on the loan 4) what is the student loan monthly payment ? 5) most loans require payment reserves of 6-12 months - this can vary from program to program 6) 4K monthly gross income with low student loan debt might allow you to qualify for a 300-4ooK loan 7) rates are now in the 5-6% range and not in the 3.5% range

[Kyle S.]

Quote from @Ashley Marrazzo:

@Michael Key @Jonathan R McLaughlin @Bob Reinhard @JD Martin @Theresa Harris @Bob Reinhard Hey everyone! Thank you for all the responses and the advice. I have reached out to my lender and asked him to use the new student loan formula based on the deferment at .5%, as well as use the new projected market rent rates towards my income. My partner and I are going to do this together, unfortunately because of his credit he cant be on the loan yet, hence why i was trying to get a loan in just my name. Seems like the most logically way would be to wait until his credit is fixed so that i can include his income, we would have to wait another 6 months if not longer, we can save up more money in the mean time. Our gross income together is 120K, Still will only have my student loan debt, but higher income, there is also the chance that his credit still wont be great combined with mine. 

Thanks again for everyones input im so glad that i have access to a resource like this and all your creative minds!

That might be good as personally have a feeling a lot will shake out in the next 6 months in most markets. I'm a huge fan of Ken McElroy on YouTube he owns thousands of rental units and he kind of said same thing on his show today. He thinks by February-March of next year a lot could change and some markets could go down a bunch in the next 6 months. Waiting 6 months could save you a ton of money depending in what market you're in. 

[Eliott Elias]

Try a DSCR loan. You won't get as great of terms but will get approved if rent/mortgage ratio is 1:1