DTI Help - STR & LTR

[Dustin Sanders]

Hey BP,

I currently own 5 properties & I have a 6th property under contract which will be a STR. All properties have conventional loans. Of these 6 properties, I will have 4 STRs (currently house hacking my primary residence via AirBnB) & 2 LTRs. Each property produces great positive cash flow & I also work a W-2 job which helps for financing these properties.

I plan to purchase a 7th property (plan to house hack) either in late summer or early fall as my new primary residence. Even though each STR has positive cash flow, lenders still won't count STR income towards my DTI ratio. This almost killed the deal I have for my 6th property that I currently have under contract. Thank goodness I barely qualified based on previous tax returns!

My question is, has anyone had to forecast future rental income on their current house hack via a LTR lease (when I move out) & forecast future rental income for my next house hack at my 7th property (new primary residence)?

I hope this is enough information & any helpful feedback is greatly appreciated!

Dustin Sanders

[Andrew Postell]

@Dustin Sanders the issue you are facing here is because of the TYPE of loans these lenders are presenting to you.  All you have to do is find a lender that provides a different TYPE of loan - and it's not that hard to find. Here's what I mean:

Generally speaking there are 2 main types of loans for investors: “Conventional” and “Portfolio”

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.  These loans have the strict requirement that you need a 12 month lease to use the rental income to qualify.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. Sometimes called "DSCR" loans. Sometimes called "bank statement" loans. Whatever they want to call them - it's THEIR money. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different. And these loans can run the GAMBIT on what they require and what they can do.  Just for reference, Chase Bank requires you to have $250,000 to even see their "portfolio" loan options.  So not even based on the property income for them.  Every lender could be totally different.  Many do have the same features.

It can be TOTALLY different from lender to lender. So we just need to get you in front of a lender that wants to lend to STR properties. That's it. And yes, they do exist. Just expect something to be different on the loan. But if you are cash flowing like a normal STR is then the little bit higher of a rate won't matter. All that matters is that I can keep this train running!

Hope this makes sense but feel free to post anything else if you need.  Thanks!

[Joseph Bafia]

spot on with what @Andrew Postell states. We ran into same thing and after 5 homes, we maxed out DTI and went the DSCR route. Then also found a seller financed deal and then private money partnerships. DTI will update with every year that passes and we can show Schedule E income for our STRs. There are options!

[Ken Vesely]

Dustin - while bank loans are good, there not always best for investors. Yes you might save a little on the rate, but hard money/soft money DSCR programs are meant to take up the slack in the lending market that banks just don't understand.

The reason so many investors don't even consider banks and go right to dscr programs is very simple - most investors don't show enough income to carry all their rentals on their taxes, why not close a loan in 15-20 days (vs 30-60 w a bank) and not have to worry about your DTI, taxes, w2, 1099's etc.

In the long run the little bump in rates vs a bank is offset by piece of mind not having to deal with banks, who's job when they lend is to only lend on what they can sell out the door the day after closing -- 

[Steven Goldman]

Dustin Ken's advice is spot on. At some point all investors face the D.T.I. challenge. Your best option will be to utilize a D.S.C.R. lender. They do not care about your D.T.I., or how many properties you have in your portfolio. Or, for that matter your W2 income. Only credit score and debt service coverage ratio.  Good luck!

[Dan Santonocito]

Just wanted to say thanks for the above posts. As a business owner who enjoys the tax deductions of it, I've been struggling for the past year about DTI, W2s, and how to break into the STR market. After reading your posts, it finally clicked that I've been looking at the wrong types of loans, and I should research portfolio loans.

Quick question, it looks like nobody publishes their rates for these types of loans until you contact them, but what is generally a good rate that I can use in my calculations? I like to do all of my homework before I start contacting prospective lenders.

[Nick Velez]

Hey Dan, a good rule of thumb is that these loans will be around a point higher than your normal conventional investment loans. 


Quote from @Dan Santonocito:

Just wanted to say thanks for the above posts. As a business owner who enjoys the tax deductions of it, I've been struggling for the past year about DTI, W2s, and how to break into the STR market. After reading your posts, it finally clicked that I've been looking at the wrong types of loans, and I should research portfolio loans.

Quick question, it looks like nobody publishes their rates for these types of loans until you contact them, but what is generally a good rate that I can use in my calculations? I like to do all of my homework before I start contacting prospective lenders.

[Andrew Postell]

@Dan Santonocito I get daily emails from lenders who have these loans. So they are published...but just not in a "traditional" place. I've seen everything from 4.25% - 6.5% with anything from a 15 year Adjustable Rate Mortgage (ARM) to a 30 year fixed. It can be WILDLY different from lender to lender. 

[Tristan Pearrow]

Hey Dustin, it sounds like what you need is a lender who understand DSCR loans and offers them. This is a loan product that is only going to look at the projected rental income from the new property in ratio to the mortgage payment. They will not look at your income or DTI whatsoever, or even ask for income documents. Once my clients get up to 5-7 properties this is the way we usually go, and lately since Fannie/Freddie are not making buying investments or second homes very favorable, DSCR has had better rates than many other programs out there right now. Hope this helps!

@Dustin Sanders