All Forum Posts by: Stephanie Medellin

How is the depreciation reported on your tax returns?  Typically depreciation is added back and won't count against you when calculating rental income.

For conventional loans (fannie/freddie guidelines), yes, the 6 months would apply.  There might some lenders that don't have that requirement, but I find that most do, even if they have more lenient guidelines.  If your Mom stays on title and just adds you, you could qualify right away.

I should have clarified that if you do not actually need the rental income to offset the payment to qualify, you don't necessarily need to show a lease.  So maybe you complete the refinance on your Mom's current house first, pay off debt, and get the down payment funds.  

Once she is ready to move and you go under contract to purchase the new house, then you could find a tenant and sign a lease, which would help offset the payment on the Wisconsin house.     

@Casey Martin  The comment above about your Mom selling tax free is definitely something I'd take into consideration if nothing has changed hands yet.  

From a mortgage perspective, it sounds like you might have enough room in your DTI to make this work if you don't have much other debt besides the student loan and the mortgages, although I have no idea what your current interest rate is, or your property taxes / insurance, or whether all your income can be counted. For that, you'd definitely need to talk to a loan officer licensed in your state to review your financials.

Here's what I'd suggest:

1.  Cash out refinance on the gifted home - you will need to be on title for 6+ months to qualify for a conventional cash out refinance.  You can borrow up to 75% of the value for a cash out refi, and can use 75% of the rent to qualify.  You will typically need to show the lease and first month rent / security deposit to use this income before it's reported on your tax return.  

When refinancing, any debt that will be paid off with the loan proceeds can typically be omitted from your debt to income ratio.

2. If you can show that your Mom has insufficient income to qualify for a new mortgage, you may be able to take advantage of Fannie Mae guidelines that allow you to buy a home for your parent(s) as a primary residence. This will allow you to put a minimum of 5% down and you would get the better owner occupied loan interest rates. Since you would not be buying this as an investment property, you cannot use any rental income to help qualify for the purchase loan, and you would need to qualify this additional mortgage payment (principal, interest, taxes, insurance, HOA). If you buy as an investment property, rates will be higher and you will need a larger down payment.

So, first you need to be on title to your Mom's home for 6 months.  Then it needs to be leased, then you can do a cash out refinance.  Once you have paid off your debt, have the home leased and you have your down payment funds, you can buy the new home for your Mom to live in.

Obviously before taking the first step, consult with a tax advisor to see if they recommend a better option, and also consult with a loan officer to plan out the scenario to make sure you will qualify for each loan. 

Hi Chris - have you checked the zoning for your parcel to see if it allows 4 units, or would you be able to subdivide?  That would be the first step.  

Are you planning to live in the one of the units or is this purely investment?

Hi Alex,

Lots of good advice so far. If this is your first property and you're currently renting, your best bet might be to use an FHA loan (or VA loan if eligible) to buy a 4 unit property and live in one of the units. It will give you hands on management experience and a place to live (hopefully inexpensively with tenants covering much of the mortgage). Even under a 580 score, you can use FHA to purchase a 4 unit with 10% down. Would any family members consider gifting your down payment, or can you set some money aside from your salary to put together a down payment?

In regards to the collections and late payments, the sooner you can get those paid off or settled, the sooner your score can start recovering.  Simply paying off the debt will not remove it from your credit report, but the older the derogatory information is, the less impact it has on your score.  After 7 years, it should fall off your report.

When talking to creditors, it would be best to NOT mention that you want to clean up your credit so you can purchase a home.  If they know you need to deal with the account quickly, you'll have less leverage.  

The very best thing you can do right now is talk to a good loan officer and have them pull your credit.  It can even be a soft pull with all three bureaus.  They can guide you in the next steps once they have the full picture (how large the balances are, how recent the late payments or collections are, types of accounts such as medical debt, installment debt, or credit cards only, which accounts have been disputed, etc.)

Debt settlement companies usually charge a monthly fee, so the longer they take to resolve your accounts, the more they can collect in fees.  Just something to be mindful of when monitoring how they are handling your accounts.  

Loans for self employed borrowers aren't necessarily more difficult - you just need to find a good loan officer who knows their guidelines. Getting a thorough pre-approval / pre-qualification where you submit your tax returns and other income documentation is essential. If you can qualify for conventional financing, there's no need to pay a higher rate with the DSCR route. If there is something preventing you from qualifying for conventional financing, then non-QM bank statement or DSCR loans are a good option. I'd recommend talking to a mortgage broker to discuss which types of programs are best for your scenario.

I've seen at least one or two programs that allow you to qualify with a 12 month rental history.  It has to make sense.  If the investment property is further away from your current home and job and you intend to stay where you are, underwriting may be ok with it.  The concern for most lenders is that you'll move into the property and then it becomes a "consumer" loan, rather than a "business" or investment loan.  You will typically need to sign an affidavit at closing that the loan is not being used to buy a property that you or your family members will occupy at any point the loan is outstanding.

Yes, some do have an interest only option, which can help with cash flow the first 10 years. If you go with an I/O option, when the interest only period is over, the loan will be amortized over the remaining term. The interest rate would still be fixed.

Really the difference is in how you qualify. Commercial lenders often want to look at your net worth and other finances, but DSCR loans focus only on the rental income of the property and your down payment / credit score / reserves. Typically they do want you to own your primary residence, and may also want to see some recent landlord experience.

DSCR loans have come out in the past few years for small commercial rental properties (5-8 units, mixed use OK), and they offer 30 year fixed rate loans. Rates will vary based on LTV, credit score, etc., but low to mid-8's is a reasonable estimate.

 Credit bureaus don't really know anything about your income or whether your properties cash flow.  While it won't directly affect your credit score, obviously having money to pay your bills on time and keep you credit card usage down will help your score.