All Forum Posts by: Stephanie Medellin

The best thing you can do is start establishing more credit - even if it takes awhile to build your credit history and improve your score.  Look for credit cards with no annual fee, use them responsibly for daily expenses, and pay them off each month to avoid interest charges.  In a few years you will have established tradelines and hopefully a solid credit score to make borrowing easier in the future.  If you have a family member willing and able to help, they can add you as an authorized user to one of their credit cards.  (I would only do this if the family member has excellent credit and is not in debt themselves.  You don't want to be added to an account that's maxxed out or that has been late or delinquent in the past.)  This may help you get approved on cards of your own.

In the meantime, learn as much as you can, analyze deals and properties, and save as much as possible to start investing.

Good luck on your test!

On one hand, the lower rate and interest savings on the 15 year loan is attractive, and if you can comfortably afford it, it may make sense.  As others mentioned, you can always pay off your 30 year loan faster if you have extra cash each month.

I'd say the main drawback for financing / qualifying purposes is having that higher 15 year loan payment factored into your debt-to-income ratio (DTI). If your properties have great positive cash flow, this may not be a problem, but it really depends. Once you have to start making up rental losses with your other income, you may be limited in qualifying for more conventional loans at attractive rates.

DSCR loans are fairly straightforward - they are based on the cash flow of the property.

DSCR stands for debt service coverage ratio. This ratio calculates how many times over the rental income can cover the monthly principal, interest, property tax, insurance, and HOA dues (PITIA) payment.

A property generating $1500 per month in rent with a $1000 PITIA payment has a DSCR of 1.5. (1500 / 1000 = 1.5)

A property generating $1000 per month in rent with a $1000 PITIA payment has a DSCR of 1.0. (1000 / 1000 = 1.0)

A property generating only $750 per month in rent but still with a $1000 PITIA payment has a DSCR of 0.75. (750 / 1000 = 0.75)

The first example will have the lowest risk, the middle example breaks even, and the last example has negative cash flow, and is losing money each month.  However, there are lenders that offer "no ratio" loans and/or will consider negative cash flow.

Some lenders will only allow long term monthly leases, and others will lend based on short term AirBnB income, either based on a 12 month history OR AirDNA reports.  

The higher your DSCR, generally the lower risk and the better pricing / lower interest rates you will be able to find. Keep in mind that as you decrease the interest rate, your payment will be lower, which will boost your DSCR.

There are other things that factor into your interest rate, as with any other loan, such as the percentage of your down payment, your credit score, loan size, property type, the length of prepayment penalty, etc.

Let us know if you have any other questions about how to make a DSCR loan work for you. 50k may be enough to get started, depending on the price range in your market.

@Bonnie Smith  There are some samples here that you can browse: https://singlefamily.fanniemae.com/fannie-mae-legal-document...

These aren't meant for seller financing but may give you an idea of things that should be included.

One other difference I didn't see mentioned above - FHA loans on 3-4 units will have to pass a self sufficiency test. This means that 75% of the rental income on all units must cover the PITI payment. This is a harder requirement to meet in certain markets.

No, I don't see 100% financing as realistic at all on investment properties. 

I've seen one hard money lender allowing 100% combined LTV, where they would finance up to half if the seller finances the other half. Normally lenders don't even want the CLTV to exceed a certain percentage. The rates and points were exorbitant - somewhere close to 15% with 5+ points. It didn't make sense.

Most hard money is based on low LTV. Lenders are willing to lend on less than perfect deals solely because there is equity available if the borrower defaults.

Owner occupied properties are a different story, and 100% is definitely possible in a lot of cases whether through down payment assistance or USDA or VA loans.

@Anna Catron  HELOCs are usually interest only during the draw period, so the formula is as simple as:

 (interest rate x principal balance) / 12 months

That's your approximate interest only payment.  I believe they calculate interest as a daily average on HELOCs, but it should be close enough to get a good idea of cost.

If the 13k is all W2 income and they approved up to $750,000, they may already be counting your rental income. Calculating rental income is not as straightforward as adding gross rental income to your income column and the PITI payment to your liabilities column.

Let's assume a 50% debt to income ratio, and rental income that completely offsets your rental PITI. That leaves you with roughly $6500 to spend on all other monthly expenses. This means that $6500 must cover:

-Housing (mortgage/land loan, property tax, property insurance, and HOA if applicable) and

-Any other monthly debt obligations (vehicle, credit card minimums, installment loans)  

With $2000 going toward a land payment, and another $1000 toward an auto loan, that only leaves $3500 to spend on your new HELOC payment. $3500 isn't enough to cover $750,000 @ 7.5%, which works out to $5244 fully amortized over 30 years (and that's not likely to be the calculation they are using). This makes me think you have good cash flow on your rentals that is being added to your monthly income.

I'd recommend asking their maximum DTI, then working backwards from there. Find out the income they are counting, as well as the debts. Also find out how they are calculating your qualifying payment on the HELOC. From there, you will be able to see if there's room to adjust any of the numbers to increase your borrowing power.

Another option is a credit line against any brokerage accounts you may have.  These function similar to HELOCs, but are secured against your other assets.

Find a contractor that's willing to do the work and be paid through closing.  If the seller doesn't close, they will owe the contractor (they could set up an arrangement to make payments, or maybe the contractor offers financing).  The important thing is that YOU are not the one obligated to pay for the repairs.  The repairs will be listed on the closing statement and the contractor can be paid directly at closing.

@Andrea Castor Is the 13k gross only rental income, a combination of rental income and other types of income, or solely other income?  This will make a difference in how your debt to income ratio is calculated.  

When your goal is to maximize borrowing power, you always want to keep all other payments as low as possible.  How can you achieve this?

If the lender allows debt to be paid off in order to help you qualify, the $1000 van payment (assuming this is a loan and not a lease) could be omitted by paying it off at closing.  The escrow or title company will issue a check directly from your credit line proceeds at closing, so the lender can ensure the debt is paid. 

If the land loan is a shorter term loan, such as a 15 year loan, it may make sense to roll that into your credit line too, resulting in a smaller payment for that remaining 200k.  

Alternatively, you could do a 1st lien cash out refinance, paying off the land loan and the van, and any other monthly liabilities while taking out the initial cash that you will need for your first project(s).  Again, the goal is to reduce your overall monthly payments by refinancing any outstanding debt into a longer term loan.  Once your first project is completed and refinanced, you could re-use that cash to complete your second project.