Too young for Conventional?

Question

Hey all-

I am 19 years old and looking to pick up 1-2 rental properties in 2014. I have owned a landscaping company for the past 3.5 years, and have grown it to net around 40k for 2013. However, I was unable to form a business before I was 18 due to laws in Michigan, and did not record any taxes for the first year and a half. For 2012, my taxable income was very low due to shielding reasons. This year, I am running more through the books to try and apply for a mortgage.

With that being said, I currently have a flip on the market that I have 50% equity in. My father bought it under his name, and we are selling it for an estimated 50k profit.

I am wondering if there is any chance a bank would lend to me. My bottom line is:

1)little to no realized income before this year (still have some income shielded)

2)After the sale of the house, my savings will be close to 85k

3)My credit score is sub par, below 700. This is due to having a small credit limit and only having a card for the past 8 months.

4)Could my dad co sign my mortgage loan? He has sufficient debt-income for a personal loan and outstanding credit.

5) I found a small bank that keeps their mortgages in house, but want to wait to approach them until after the sale of the house to show them my padded savings.

Thank you

Carson M. · Answer

Account Closed I appreciate your response. As far as private lenders- for a buy and hold property, how can one benefit from such a deal? I have enough reserves to buy a so so home in cash, but would rather utilize leverage. The way I see private lending deals for rentals are 1) a 100K house you need 50K from a lender, they give you the 50K in return for 50% ownership. How can I capitalize off their money if I cannot use their money to get a better rate of return on my behalf? 2) Come to an annuity like agreement. Maybe have a 10% interest rate for a 100k home and borrow 50k from the investor. Make interest payments and some principle for a few years then a lump sum fee at the end for a significant amount of the principle. With those terms, why not just buy cash out front? I see the benefits and how private money is used for financing flips, but I do not understand how I can utilize such methods for a rental. Any insight/ articles would be much appreciated. Carson

Stephanie Medellin · Answer

Oh, and congratulations on having achieved so much at 19! What you have done so far is really impressive. Don't waste money or go into debt by going to college - you're already a success!

Stephanie Medellin · Answer

Plan out how much you'd like to spend & borrow, and speak to a lender to determine how much income you need to qualify. Amend your 2012 taxes and claim the amount of income you need, plus a little cushion. DTI's are going down to 43% 1/10/14, unless you get a DU approval for more. That could be difficult with limited credit history, but I don't know if you have 3 scores or what your scores are. Claim enough income for 2013 too. It would be best to have a CPA or tax preparer file both returns, as you'll need a CPA letter to verify that you've been self employed for the past two years, unless you have a business license for your city. Order a tax transcript to verify that your returns have been processed. You can call the IRS 1-800 number and order it over the phone. It is an automated system. Since you don't own any property under your name, why not get a 4-plex owner occupied with an FHA loan? It will be a low down payment and they can work with non-traditional credit history such as a cell phone payment, or other bills you've paid consistently over the last 12 months and can document. I know this may be hard to come up with accounts having lived at home, but try to think of a few. The real downside of FHA is the upfront and monthly mortgage insurance, but you can always refi to conventional after you've built up your credit. If you still cannot qualify on your own, hopefully your Dad will agree to be on the loan with you as a non-occupant co-borrower.

Account Closed · Answer

Is your business return a sole proprietorship filing a 1040/Schedule C? And you're not being claimed by your parents for either 2012 and 2013? If it were me, I'd consider amending the 2012 return and file your 2013 as soon as you are able in 2014. I'd unshield some of that income asap and bite the bullet and pay the taxes and penalties. That gives you 2 years of documented income starting early 2014.

Chris Marroquin · Answer

You should consider Hard Money as well - less down, no credit requirements, and no DTI requirements.. It certainly costs more but until you qualify for conventional its a great alternative.

Carson M. · Answer

@Michael Dundon , I would definitely be up for meeting up sometime. I would very much like to pick your brain on the Oak Park market and the niche you've found there, and setting up and seeking out private lending. I am a full time student at MSU, so time is pretty tight these next few weeks with finals and my landscaping work winding down. If you would like, feel free to email me at reliablesnow.lawncare@yahoo.com and we can figure out a time to meet up. I'll be home for Christmas break mid December to early January. Thanks, Carson

Michael Dundon · Answer

Hey Carson, My partner and I have bought 38 Single Family Rentals over the last 2 1/2 years in South Redford and Oak Park using Private Money. 100% financing. I would never tell anyone that it was easy- takes a lot of preparation and luck. I couldn't have qualified for a conventional mortgage to save my life over the past 2 1/2 years. Still couldn't actually. Incidentally, my partner owned a lawn company that he started when he was 14- he just sold it this past spring to focus 100% on Real Estate. Your business experience with owning a company will go a long way as far as getting private money. I would network like crazy at the local REIAs- there are a ton of good ones around here- Like someone said earlier there are a lot of people looking for better returns on their money. Anyway, I live in Ferndale too. Would love to meet up and give you any tips, advice that I can. Mike Dundon

Carson M. · Answer

Thanks, Bill. The credit part is difficult due to only being issued a $1500 limit on my Visa card less than a year ago, and being unable to get a store credit yard, such as a home depot card, due to a low credit score. It is not that I have any late payments or balance, just a lack of limit and history. I need to try again to up my limit and apply for a second card.

Bill Gulley · Answer

Ed is right on it, I've done secondary market loans with 18-20 year olds with their parent(s) as borrowers or co-borrowers, it's not you age, it's having no credit or very little credit. I also suggest people stay away from Quicken Loans. An application fee is paid and they will simply ignore any right of recession and keep your money. What they call an appraisal is a Realtor driving by, rolling down the window and taking a picture from the street. I got my first loan on my own at 17, from a loan shark personal loan shop, it took some talking but I convinced the guy he'd get his money back and he did. I was emancipated living on my own so he bought that, otherwise it's 18. Aaron has part of that right on paying off credit cards, but even with a zero balance your average balance will be seen as a debt for qualification purposes, you need to close the account to avoid this. The trick is to make application saying the account will be paid off and closed, credit is pulled, the account is then paid off and closed prior to closing or at closing. Credit that was pulled is still used. If you have funds to buy, a fix a flip, get a bank loan at 50% LTV, put the cash in a CD and pledge the CD. When you sell the place you can leave funds there and repeat or take the money back out. This, at about three times will establish your credit with most banks to do a 4th deal without the CD. Do good there, you can then ask for the regular deal, say 70% LTV. After that, you should be on your way. Once you can meet the credit requirements Ed pointed out, you can look to the buy and hold type deal, having some experience in other areas of RE should slide you through especially with good cash reserves. It's tough getting started at a young age, I know. Good luck :)

Wendell De Guzman · Answer

@Carson M. , what you refer here as private lender is actually an equity investor. Also, not all equity investors want 50% of the deal. It all depends on how you position things to them. Keep in mind a lot of busy professionals only get 1-2% return on their money as it sits in their savings accounts. If you approach them and tell them that your real estate deals give you 12-15% return and you're willing to share some that return (say 8%), some people will be excited and may want to invest with you to have a piece of the action. Of course, it all starts with a good deal. As I tell the younger folks...when you have a good deal, the money follows.