Is A Portfolio Loan Best For Me?

Question

Good evening everyone! I'm actually just looking for some advise on a decision I need to make. I am looking at getting into real estate investing and I plan of doing it through single family or small multi-family rentals using townhouses or possibly condos at first. I'm currently on chapter 5 of the BP Ultimate Beginner Guide and I'm at point where I feel like I need to make up my mind on the type of loan I should use so I can start pursuing that option. After reading the guide, I decided that either a conventional loan or a portfolio loan was best for what I want to do. Ideally I'd like to go with a conventional loan over the portfolio for the better rates but theres one issue, my debt to income ratio. My gross annual income is only around 41K at my current job and my only debt is my VA loan on my home which I've been in almost 2 years and I pay $812 a month. I still owe $143,000 on it. For the rental I'm planning on a budget between $120,000 -$150,000 and I do have enough cash for the 20% down. There is one catch to this all though. I am currently renting out a room in my house for $600 a month. If I included that into my gross annual income then I should I have no issue meeting the required debt to income ratio for a conventional loan but unfortunately I have been doing this for only a few months (I believe 10 months now?) and have yet to record this on my income taxes for this year as I have yet to file them for 2019. I talked to my local big branch bank as a first step to see if they would approved me for a second mortgage and I was turned down for my debt to income ratio as they could not include the rent money I am collecting on my room because they would need 2 years of proof. So to my question. If I added my $600 monthly room rental income on my taxes this year, is there any lender out there that would take that into consideration when calculating my debt to income ratio or will the lack of two years worth of proof be a dealbreaker for most lenders? If a conventional loan is out of my options for now, is a portfolio loan my next best option? I heard that they aren't as strict on things such as debt to income ratios but that their interest rates tend to be higher? How much higher can I expect the interest rates to be over a conventional loan? Are there any other great loan options that I'm missing?

Troy Pletcher · Answer

Thanks @Jaysen Medhurst for replying to my long unorganized post haha. Maybe it was the way I worded it but I feel like I have a pretty good understanding on how a portfolio loan works. I was just under the assumption that the interest rates would be higher than a conventional mortgage but maybe I was wrong? It looks like a portfolio loan is my best chance at getting approved until I have two years worth of rental income proof to meet the DTI ratio required on a conventional loan. Unfortunately a HELOC is not an option on a VA loan or so I was told. I honestly feel like I don't really need to pull out any equity on my house just yet as I have $20,000 cash to use as a down payment on a rental and then I have another $32,000 in stocks I can pull out if needed. Obviously the bigger the down payment thought, the better my DTI ratio should be I guess.Another option that I am currently thinking about is selling my home(to free up my VA loan and hopefully make a profit) and then trying to find a nice duplex to house hack. I feel like I could live almost mortage free and then still have enough cash to purchase a separate rental.

Jaysen Medhurst · Answer

Okay, a lot going on here, @Troy Pletcher. First off, I think you're confused about what a "portfolio" loan is. It isn't fundamentally different than a "conventional" loan. The only difference is that the lender (typically local/regional banks and CUs) keeps the mortgage in their "portfolio," as opposed to selling it to Fannie/Freddie or another part of the secondary market. Rates and terms are usually very competitive, if not better, than conventional lenders and there is more flexibility, since a portfolio lender doesn't have to conform to Fannie/Freddie underwriting standards. That's why these loans are sometimes called "conforming."When you write "portfolio," I think you may be referring to a commercial loan. Plenty of info here and on the web about the differences. One major plus is that the lender will be more concerned with the quality of the deal, than your credit score, DTI. To answer your questions:Include the room rent you're getting on your taxes. You should be able to deduct some portion of your home's expenses. Make sure you talk with a good CPA, who has REI experience (*I'm not a CPA*).You'll need the 2 years of history for most lenders to consider it as part of your income. It's worth asking your lender, though. Especially, if you're working with a portfolio lender as mentioned above.I wouldn't look to a 2nd mortgage, if you're trying to access some of your home equity. HELOC is probably a better way to go. Great for short-term debt.