How Long Should You Wait Before Getting Your Next Loan?

How long do you need to wait between securing loans for investment property?

Well, if you follow the advice in the general media, you should wait six months in between mortgage applications for the credit inquiry to fade away on your credit report before applying for a new loan.

If you follow this advice, this means you would only be able to secure two loans a year. Not exactly a fast path to building wealth.

So, what is the true answer to this question?

Qualifying for Multiple Loans

If you are just starting out, most likely you will be using conventional lending to get your first few properties—and not all conventional lenders work (well) with investors.

For this reason, it is worthwhile to find an investor-savvy lender. This type of lender truly understands what you are trying to do, which is to use leverage to build your wealth. Also, they make money by lending people like you money.

It’s a win-win!

An investor-savvy lender is on your team. So, it is to your benefit that they are fully aware of your purchasing plan and that you allow them to guide you if there is an issue (i.e., be coachable!).

For me, my lender was (and is) indispensable to my growth. I had my lender on speed dial and would proactively plan initial hard money loans, refinances, and the occasional straight purchase. I side-stepped many investing landmines just by having my lender fully involved in my plan.

Potential Issues & How to Solve Them

Problem: Having too many loan inquiries in three to six months will negatively impact your FICO score.

What to do: First, find an investor-savvy lender. Next, if this is an issue for you, your lender will give you a standard form to mark an explanation for the inquiry, such as “Shopped for home/mortgage history on credit report.” Lenders know that investors shop around and should proactively be asking about your credit inquiries.

Problem: When you close an investment property loan, your FICO score drops.

What to do: Yes, you will see a temporary drop in your FICO score each time you close a loan. The magic FICO number for optimal financing rates is 740 (this doesn’t mean you should wait until your score is 740 before you invest). However, once you start paying on the loans, your score may actually go up. Bonus! You can use a site like CreditKarma.com to keep track of your FICO score.

Problem: When purchasing or refinancing any property, you may be turned down for a loan even if you have a good, stable job.

What to do: If you are using conventional lending, you must show stable income, as well as meet two other income-based requirements:

Debt service coverage ratio (DSCR): This is the ratio by which the income on the property will cover the expenses (principal, interest, taxes, insurance, and other expenses like HOA dues). Therefore, work with an investor-savvy lender that can use the income from the property, as stated on the lease or in the appraisal, to offset the expenses on the property. Most lenders will use a 1.2 or 1.25 DSCR ratio (so ask which it is). This means if your expenses are $1,000/month, to reach a 1.25 DSCR, you need to rent the unit at $1,250/month. Now… you may actually get lending on the first few properties that fall under that DSCR. So, that leads to the next criterion…
Debt to income (DTI): This is the ratio by which all of your qualified income covers your expenses as the borrower. This includes all debt, such as any consumer debt AND any debt from other properties, should the DSCR fall below 1.2 or 1.25 (whichever ratio the lender is using). For example, if we take the same property that has expenses of $1,000/month, you rent it for $1,100/month, and your lender uses a 1.25 DSCR ratio, the difference of $150/month will fall to your DTI. Do this too many times, you may be disqualified based solely on your personal DTI—even if all of your properties cash flow.

Problem: If you don’t have enough reserves for subsequent properties, you could get denied for a loan.

What to do: Your lender wants to know if you can weather three to six months of expenses on all of your properties should they be vacant and will want to see this in liquid reserves. And you also need to show reserves for the next loan you are going to get (more homes = more reserves). Discuss with your lender what reserves you need to show and what accounts qualify as reserves (you might be surprised what a lender considers liquid… so ask!).

Problem: Having too many transactions (including refinances!) going at once could cause you to get denied for a loan.

What to do: At the end of 2018, I was trying to pull off what I thought was the mother of all lending situations: two refinances for BRRRRs fresh out of rehab and three purchases in 30 days. Let’s just say it was a tense time and tons of paperwork. However, I picked up the phone and called my lender. He quickly reviewed my situation and advised I close the three conventional purchases first in order to get that deal done and take advantage of rates. At the same time, my lender set up the refinances and had them ready to close two weeks later. In 30 short days, I was back to buying when my FICO scores popped above 740, and I had met the new reserve requirements.

Conclusion

As an investor, getting subsequent lending can be simple with proper planning up front. As you can see, with proper planning, you may never need to pause long before you get your next loan to build your portfolio.

So, let’s recap what to do to get started on a smooth lending path:

Find an investor-savvy lender who truly understands your investment strategy and the real estate empire you are trying to build. (Bonus points if they are an investor themselves!)
Understand that your lender is way more than a vendor. They are a TEAM member. Make sure they are fully aware of your purchasing plans and be open to feedback as they guide you on how to execute that plan.

And, if you get stuck in a lending situation (any situation really) where you are told NO, I challenge you: Don’t take NO for an answer. Always ask, “How can I…” until you get to the root of the problem to solve.

Happy purchasing!

What lending issues have you encountered? What solutions have you utilized?

Share below in the comment section!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.