Acquiring Equity Loan from Property Value without Income?

[Becky Fromm]

Hello! I own a beautiful piece of land in Carson, WA with much potential for short term rentals. The land consists of 9 acres, 1100 feet of creek and two waterfalls, many great trails and even a pedestrian bridge we built ourselves (permitted). On it currently, sits a 4 bd/4bath house (1900 sq ft) that we built in 2018-19. There is $259k left on that mortgage (originally $280k).

Zillow is valuing the property at $745k (I think that is low based on the older and smaller neighboring homes on single lots). Even if that is accurate, it seems there is plenty of equity to be had, but we are having trouble securing a loan for a STR.

My mom lives on the ground floor of the house and Airbnbs the 2nd floor (with it’s own entrance). I own the land and have added my mom to the deed, so we are both on that, but she is the only one on the mortgage. She makes about $35k/year, but after inquires to multiple banks, they are saying her income is not high enough to pull out sufficient equity. I quit an unhealthy corporate job last year, and while I’ve been thoroughly enjoying my respite (I’m currently in Colombia teaching yoga at a hotel in the jungle!), it’s not ideal for getting funding. I can and will eventually work again (I'm an architect and psychologist), but would first like to explore my options that would allow me to develop this investment full-time.

Calculations say I can add a 1bd/1bath, 400 sq. ft. cabin with hot tub for $125k all inclusive.

To the loan officers, between my mother and myself, what are our options to acquire funding based off the equity of the land without having high income?

I’m open to any advice you may think we need in our scenario.

Thank you!

Becky

[Jay Hurst]

Quote from @Becky Fromm:

Hello! I own a beautiful piece of land in Carson, WA with much potential for short term rentals. The land consists of 9 acres, 1100 feet of creek and two waterfalls, many great trails and even a pedestrian bridge we built ourselves (permitted). On it currently, sits a 4 bd/4bath house (1900 sq ft) that we built in 2018-19. There is $259k left on that mortgage (originally $280k).

Zillow is valuing the property at $745k (I think that is low based on the older and smaller neighboring homes on single lots). Even if that is accurate, it seems there is plenty of equity to be had, but we are having trouble securing a loan for a STR.

My mom lives on the ground floor of the house and Airbnbs the 2nd floor (with it’s own entrance). I own the land and have added my mom to the deed, so we are both on that, but she is the only one on the mortgage. She makes about $35k/year, but after inquires to multiple banks, they are saying her income is not high enough to pull out sufficient equity. I quit an unhealthy corporate job last year, and while I’ve been thoroughly enjoying my respite (I’m currently in Colombia teaching yoga at a hotel in the jungle!), it’s not ideal for getting funding. I can and will eventually work again (I'm an architect and psychologist), but would first like to explore my options that would allow me to develop this investment full-time.

Calculations say I can add a 1bd/1bath, 400 sq. ft. cabin with hot tub for $125k all inclusive.

To the loan officers, between my mother and myself, what are our options to acquire funding based off the equity of the land without having high income?

I’m open to any advice you may think we need in our scenario.

Thank you!

Becky

Gorgeous property! The issue you are running into is called ability to repay (or ATR). For owner occupied properties federal law requires lenders to verify the ability to repay by the borrower. So, the about your mom can borrow is limited by this requirement. ATR rules do NOT apply to investment properties so products like DSCR loans and often hard money loans do not look at the borrowers income. But, it is required for owner occupied. That does not mean that pay stubs and tax returns are the only way to prove ATR fir example bank statement loans for the self employed is a method to verify ATR. But, there has to some documented way to make the loan.

[Becky Fromm]

Hi Jay, thanks so much for your reply! Is a DSCR loan something I could look into since I don't live on the property myself? Or, that's too much of a stretch since my mom is essentially an extension of me? Or is potentially my only option then to look at hard money loans? I'd down some research a while back but was finding 12-14% interest. Any idea on looking for those where interest isn't wildly high? Thanks again :)

[Jay Hurst]

Quote from @Becky Fromm:

Hi Jay, thanks so much for your reply! Is a DSCR loan something I could look into since I don't live on the property myself? Or, that's too much of a stretch since my mom is essentially an extension of me? Or is potentially my only option then to look at hard money loans? I'd down some research a while back but was finding 12-14% interest. Any idea on looking for those where interest isn't wildly high? Thanks again :)

DSCR and hard money are only going to be for investment properties for the reason I outline above. You stated that your mom is both living in the property and on the mortgage. She would need to move out of the property to be eligible to refi into a DSCR/hard money/private money what ever you want to call. 

[Chris Seveney]

@Becky Fromm

If you took your mom off the deed and the loan you could possibly get someone to give you a first on it as a DSCR or private / hard money but then your interest rate is going to be pretty high (double digits)

[Adam Davis]

You could potentially transfer the home and debt into a trust/LLC, and have your mother "rent" it from the company. Here's what I'd think could work:

1. Start a LLC with your Mom.

2. Buy the property with the LLC for the cost of the existing mortgage, perhaps plus the cost of the construction. I don't know if LLCs can take out DSCR loans, so you might need 25-35% down for an investment property, but I would imagine that a $745k property should be able to fetch a loan for 70% with the remaining equity applying toward down payment.

3. Build the secondary units and legalize them, then refinance with them in place. Ideally, they'll cover your new mortgage payments.

Lenders (especially creative/hard money), chime in and tell me if I'm crazy.

[Jay Hurst]

Quote from @Adam Davis:

You could potentially transfer the home and debt into a trust/LLC, and have your mother "rent" it from the company. Here's what I'd think could work:

1. Start a LLC with your Mom.

2. Buy the property with the LLC for the cost of the existing mortgage, perhaps plus the cost of the construction. I don't know if LLCs can take out DSCR loans, so you might need 25-35% down for an investment property, but I would imagine that a $745k property should be able to fetch a loan for 70% with the remaining equity applying toward down payment.

3. Build the secondary units and legalize them, then refinance with them in place. Ideally, they'll cover your new mortgage payments.

Lenders (especially creative/hard money), chime in and tell me if I'm crazy.

Mom owns the LLC. Mom still lives on property. Still a ATR loan. An LLC does not change the fact that mom is still living in the property.

[Becky Fromm]

Thanks , @Chris Seveney, I am hoping to avoid those double digit interests, but good to know it could be an option if necessary.  Also to @Adam Davis, thanks for your creative thinking! I'd entirely be down to try something like you suggested, a workaround. Looks like Jay isn't too optimistic about that idea specifically. As you'd also mentioned, curious if others lenders have a slight shift in such an idea that that could work.  Thanks again. 

[Chris Seveney]

Quote from @Becky Fromm:

Thanks , @Chris Seveney, I am hoping to avoid those double digit interests, but good to know it could be an option if necessary.  Also to @Adam Davis, thanks for your creative thinking! I'd entirely be down to try something like you suggested, a workaround. Looks like Jay isn't too optimistic about that idea specifically. As you'd also mentioned, curious if others lenders have a slight shift in such an idea that that could work.  Thanks again. 

 whats the purpose / use of funds for pulling the equity?

[Becky Fromm]

To add a short term rental on the property (hopefully the first of many). 

[David Ross]

Hey Becky,

First, WOW, I love that place!  

Beyond that, I am a Mortgage Branch Manager and my team specializes in working with investors. Ideally, we can connect next week and my team and I can provide a free consultation on what may work best for you and your Mom with a few more details, but if I were to take the situation at face value and try and brainstorm an idea.  Perhaps a Reverse Mortgage could work.  I am not sure how old your mother is, but if she has substantial equity like you are saying, she can pull it out, pay off the original loan, and even eliminate her payment.  Now, it seems like the goal would be to keep that property in the long run, so you would want to Refi that in a few years when rates come down and you again can qualify for a more traditional mortgage, but there could be a path to getting around $100k and taking the next few years to focus on banking cash flow and possibly expanding.

I know, it's a bit out of the box, but if we were just blue sky talking about a solution, it's possible. Another one would be the DSCR option, as others mentioned above, but I think you would have to buy the home from her, and build the income valuation based on her being a renter in the future. Actually, that may be the better bet for getting more cash out now and we offer an Interest-only program on DSCR if you were trying to max out re-investment in the short to mid term.

Overall, there are a lot of nuances and a few questions we would have to confirm to be sure we were setting you up with the best program for you. We welcome the opportunity to connect and provide a free consultation, if that interests you.

If so, please schedule a time with me below and we can connect.

https://bit.ly/Meet--David

Sincerely,

David Ross

[Becky Fromm]

@David Ross Excellent, I've just scheduled for Wed, both my mom and I will attend.  Thanks David!

[Adam Davis]

Quote from @Becky Fromm:

@David Ross Excellent, I've just scheduled for Wed, both my mom and I will attend.  Thanks David!

 David is talking about what I'm describing. Worst case: While interest may be somewhat elevated, think of it as a high price for a short time rather than something you're locked into forever. Most likely scenario is that you're able to add the improvements you're looking for and will be able to refinance into a whole-property mortgage in under a year, depending on the improvements. That means you'll only be paying that higher price for a limited time, and it may not necessarily be on the whole value. Might be a good idea to see if you can get equity financing on a small portion rather than the whole thing, to keep payments as minimal as possible.