Avoiding the DTI ratio

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Avoiding the DTI ratio

Alexander Ball
Ann Arbor, MI · Member since 2008 · 90 posts · 20 votes

I am about to start looking at some homes that I have scouted with a Realtor. My plan is to buy, hold, and rent the homes that I buy, but I am having a little bit of financing problems.

Mainly, I have no income. I am sick of working to make other people rich, and I want to make myself rich! So, I am going to be taking a lot of classes this semester and I want to make managing and investing and properties my income. I would love to graduate in two years with two houses well on their ways to be paid off.

However, I am having a big problem overcoming this DTI ratio. I have a large amount of capital, and not bad credit, but I can't prove my income is high enough to take on the debt. This is frustrating because 1) I am only looking at properties with a positive cash flow and 2) I have enough in my checking account to take care of these mortgage payments in case something happens for a couple months.

What can I do? My dad could co-sign with me, but he wont because he doesn't want his assets in danger. Could I create an LLC that my father could cosign to take care of my DTI problems, and still make him save from reprise?

Any help here would be much appreciated. Thank you again to the biggerpockets community.

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Michael Shadow
Investor · Bellefonte, PA · Member since 2008 · 1k+ posts · 88 votes
18y

If you work with a local bank and they know the values of houses in the area and you negotiate a great price (< 60% FMV) and they know that you are going to turn it into a rental and they see that you have 6-8 ,months of carrying cost saved in an account they should lend you the money.

Shop around at your local banks, not the Ameriservs and bank of americas, and stay away from brokers. Speak with whomever is in charge of lending (usually a VP).

Go meet your banker in your finest clothing (you're a business man, dress like one) and put together all your financial statements. Take in your last two years tax returns. Download a residential loan app off the web and pre fill it out and take it with you. Write up a cover letter explaining why you are visiting that banker and detail out your business plan for your rentals.

If you have a property picked out take photos of it, get the tax docs from the courthouse and draw up your income/expense estimates for the first year and show how you will make it work.

Place COPIES of all of these papers in a 1/2" three ring binder that you can give to your banker and leave it with him.

If you have a good well thought out plan and good credit you should be well on your way to getting pre-approved for your investment property.

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  • Matt DuSold
    Lender · Phoenix, AZ · Member since 2008 · 351 posts · 40 votes
    18y

    If the the person who is selling the property you could see if a Sub-to is possible. If you are not sure what a sub-to is you should use the search on the site and search "sub-to". You will find far more information in a short time than I can type. If they are willing to do a sub-to deal you would be able to avoid banks.

    I am not as experienced as many others on the site but this sounds like it would be great for you (unless I'm missing something).

    0Reply
  • Alexander Ball
    OP
    Ann Arbor, MI · Member since 2008 · 90 posts · 20 votes
    18y

    Thanks for the reply. Sub-2 is something I have definitely been considering. Any other ideas?

    0Reply
  • Account Closed
    Minneapolis, MN · Member since 2008 · 691 posts · 12 votes
    18y

    You could purchase a list of absentee owners from Melissadata.com, and send a marketing piece. When they call you back, or you call them to follow up, you could make low offers and buy at a discount. Try for Sub-to, contract for deed, or lease purchase to avoid banks. Good luck, Mike.

    0Reply
  • Michael Shadow
    Investor · Bellefonte, PA · Member since 2008 · 1k+ posts · 88 votes
    18y

    If you work with a local bank and they know the values of houses in the area and you negotiate a great price (< 60% FMV) and they know that you are going to turn it into a rental and they see that you have 6-8 ,months of carrying cost saved in an account they should lend you the money.

    Shop around at your local banks, not the Ameriservs and bank of americas, and stay away from brokers. Speak with whomever is in charge of lending (usually a VP).

    Go meet your banker in your finest clothing (you're a business man, dress like one) and put together all your financial statements. Take in your last two years tax returns. Download a residential loan app off the web and pre fill it out and take it with you. Write up a cover letter explaining why you are visiting that banker and detail out your business plan for your rentals.

    If you have a property picked out take photos of it, get the tax docs from the courthouse and draw up your income/expense estimates for the first year and show how you will make it work.

    Place COPIES of all of these papers in a 1/2" three ring binder that you can give to your banker and leave it with him.

    If you have a good well thought out plan and good credit you should be well on your way to getting pre-approved for your investment property.

    1Reply
  • Alexander Ball
    OP
    Ann Arbor, MI · Member since 2008 · 90 posts · 20 votes
    18y

    Hey Mikes, thanks for the great replies! I had no idea that the local banks would do something like that. It just always seemed to me to be a formula that they can't bend, but maybe that is because I am working with Chase Bank now.

    Now, I have a related but possibly silly question. You are a lender and a 22 year old kid approaches you, well dressed, and prepared, but he has LONG HAIR. Is this going to keep me from getting a loan? I know its silly but it would be heart breaking if my vanity kept me from getting a loan.

    Bite your lip and give any serious replies that you might have.

    Mr. Shadow your post here is so motivating. It really shows how inexperience can stop you before you even start. Thanks for the advice!

    Mr. Sedwick, I'm afraid I just dont trust my marketing skills to get that done. I have no experience there whatsoever, and I think trying to market, make cold-calls, and setting up my first RE deal could be a recipe for disaster, but I have been trying to find more Subject-2 and contract for deed deals.

    0Reply
  • Steve Wood
    Real Estate Investor · Waynesboro, MS · Member since 2008 · 26 posts · 0 votes
    18y

    I may be wrong here but isn't FHA reducing the number of investment property loans to 4 per person and if that is the case wouldn't be hard to produce a substantial income from just 4 properties. Seems to me like the inverse purchase or the sub2 would be the best way to build cash first and later invest in rental properties.

    It will be inetersting to see what the new regulator that Bush appointed is going to do Investors!

    0Reply
  • Alexander Ball
    OP
    Ann Arbor, MI · Member since 2008 · 90 posts · 20 votes
    18y

    Isin't the 4 loan limit avoidable? Our four properties make us income, we gain equity, and when we want to get cash out for another down payment, we refinance out the equity and THEN we can start doing sub2 or inverse purchase (whats that?)

    Does the order of how we finance our properties matter?

    0Reply
  • Mike W.
    Rental Property Investor · Twin Cities, MN · Member since 2008 · 94 posts · 10 votes
    18y
    Originally posted by Alexander Ball:
    Hey Mikes, thanks for the great replies! I had no idea that the local banks would do something like that. It just always seemed to me to be a formula that they can't bend, but maybe that is because I am working with Chase Bank now.

    Now, I have a related but possibly silly question. You are a lender and a 22 year old kid approaches you, well dressed, and prepared, but he has LONG HAIR. Is this going to keep me from getting a loan? I know its silly but it would be heart breaking if my vanity kept me from getting a loan.

    Bite your lip and give any serious replies that you might have.

    Mr. Shadow your post here is so motivating. It really shows how inexperience can stop you before you even start. Thanks for the advice!

    Mr. Sedwick, I'm afraid I just dont trust my marketing skills to get that done. I have no experience there whatsoever, and I think trying to market, make cold-calls, and setting up my first RE deal could be a recipe for disaster, but I have been trying to find more Subject-2 and contract for deed deals.

    If you are bringing up the vanity question, I am guessing you have felt discriminated due to this before. New relationships tend to be built on first impressions. You may be able to afford to look how you want when you have arrived, but when you are on the journey, you may need to look the part as sad as it is...

    I struggle with the same issue. I wear a long goatee. I have cut it short and let it grow a number of times over the years. Specifically with hair, it always grows back...unless you are losing it...

    Overall, It all depends on how hard you are willing to work to get people to see beyond your exterior, if you don't want it to be an issue, fix it.

    0Reply
  • Account Closed
    Minneapolis, MN · Member since 2008 · 691 posts · 12 votes
    18y

    I wouldn't worry about having long hair. You should just go into any appointment by being respectful of the person you are meeting with - which means clean clothes, not too casual, and groomed well. Don't walk in there with jeans and tennis shoes. Slacks, or docker type pants, a nice shirt and regular newish shoes are just fine. If you want to blow them away then you can wear a coat and tie, but not necessary IMHO. Long hair, when clean looks just as good on a guy as on a gal! Good luck, Mike

    1Reply
  • Jason Hanson
    Real Estate Coach · Oakton, VA · Member since 2008 · 695 posts · 43 votes
    18y

    Everyone is right that you need to learn lease options and subject-to. You should not have any bank loans on your credit report (maybe a primary residence) so your DTI never matters.

    0Reply
  • Alexander Ball
    OP
    Ann Arbor, MI · Member since 2008 · 90 posts · 20 votes
    18y

    In my e-mail inbox: order confirmation of Wendy Patton's lease option and subject-2 book.

    0Reply
  • Account Closed
    Minneapolis, MN · Member since 2008 · 691 posts · 12 votes
    18y

    Yay Alexander! Happy reading.

    0Reply
  • Account Closed
    Real Estate Investor · CA · Member since 2008 · 81 posts · 0 votes
    18y

    Steve, how you know about the inverse purchase?

    0Reply
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