Getting the refinance loan when using the BRR Strategy

[Brian Chase]

I am currently a self-employed lawyer and I want to get into buy and hold investing. I like the idea of the BRRR strategy. However, I've been told repeatedly that I do not qualify for a traditional 15 or 30-year mortgage due to my debt-to-income ratio. My current mortgage puts me fairly close to the 40% ratio that seems to be the cutoff for getting a traditional loan.

I've been told that bank lenders will not add in rental income to your overall income until you have 2 years worth of it. So, I'd have to have a renter in the house for two years before the rent income for the house would be taken into account.

So, I'm a little worried about moving forward on purchasing a house with the plan of rehabbing and refinancing, if I can't get that refinance loan at the end.

Anyone experience this? Anyone have any suggestions on how I can try to minimize my risk of not being able to refinance? I haven't yet found a property where I can make the numbers work with the high interest on private money.

My other issue is that I'm currently selling my home with plans to buy another one (need more space for my family). I think I want to wait to start investing until I purchase my own home so I don't end up in a position where I can't qualify for a mortgage for my own house.
I will be looking to buy a property where I can house hack, I'm just hoping to also pick up a rental property this year.

[Travis Hughes]

@Brian Chase if you are at 40% DTI on your current mortgage, and you want to sell the house to buy one with more space, I hope you are looking at getting a new home that gives you more space at a lower price?

DTI at 40% solely from the homestead property is too high IMHO. Just because the banks will lend it doesn't mean you have to borrow it. Also, the less you spend on housing, the more you have to invest elsewhere.

My recommendation would be to keep it at 25% or below. 

If your DTI were lower to begin with, you would be able to qualify for a second loan. For example, my home was at about 15% DTI when I bought it. I've still got another ~25% of DTI headroom to buy another house when I'm ready - no worries about the rental income.

Whatever you do with buying a new house, make sure you purchase it with the ability to rent it out later in mind. For example, if you do a minimum 3.5% down FHA loan, you will probably be too leveraged to cashflow on a rental. Additionally, my understanding is that you can't have PMI removed from an FHA loan. For that reason, I went with 5% down on a conventional loan for my home a few years ago. I still have PMI right now, but it would cashflow a bit if I move and rent it out.