What should my approach be given my situation?

Question

I own a single family home free and clear, worth about $350k. I also have about $50k for a down payment. My FICO scores are 750+ and I have no debt of any kind. However, my monthly income is less than $2,000. Traditional lenders have told me I'd be lucky to get a $100k mortgage, which might get me a condo, but really I'd like to start with a duplex. I do have a friend, also with 750+ FICO and no debt, who is willing to co-sign. Our combined income would be about $3,500 a month. What are my options by myself, and with the co-signer? Based on my limited knowledge, I'd guess if I wanted to start with a $250k+ duplex I'd need to cross collateralize? Thanks!

Albert Bui · Answer

Upstate NY is quite affordable and its not out of the question to get approved with the above scenario. Try introducing the rental income of the other units on a 2-4 unit property into the equation. Typically lenders can use 75% of the gross lease agreements of the other units besides the unit you're going to be living in. If its a fourplex you can use OPM or other peoples money/income of lets say 1000 per month per lease X 75% X 3 units (in a fourplex and you're living in the 4th unit). This comes out to an extra 2250 per month qualifying income in addition to your 2000 per month, now you have 4250 per month and you can qualify up to 45-50% of this (use 45% to be conservative) which comes out to about a max mortgage payment of 1912.50 / .00725 = roughly 260k of mortgage + your down payment = total maximum sales price you're approved for.

I hear upstate NY is a lot less expensive so hopefully that quick example of how you can get up to 260k of loan amount approval is applicable but you can always adjust your numbers to your actual sub market or town/city/area.

@Carlos Valencia@Matthew Kwan

Greg Scott · Answer

You need to get out of W2 thinking!  You have done a good job of managing your finances, but you need to take the steps to move to the next level.Congrats on having no debt.  Unfortunately, having no debt of any kind probably hurts your ability to qualify for a loan.  Realistically the banks like to see you have payments to make and you make them.You might want to move beyond "traditional lenders".  They are only used to providing mortgages to people that want to live in the house.  If it is a rent property, the property income helps you qualify.  Find a mortgage broker that knows income property.  You will qualify for a much bigger property than you think.

Mark Munson · Answer

I would avoid a partner and do a DSCR loan, like mentioned above. Your credit score will qualify for lower DSCR rates (LTV matters too). You can look at a buy down if you want the floor rate too. You can either tap into the equity you have, or $50k is enough for a down payment (I'd estimate 20% of the purchase price as the down payment). This would allow you to establish a relationship with a HML too, so you can open up other options as you scale. Happy to connect to answer any questions.

Paul De Luca · Answer

@Noah F.

You've received good advice on the financing front but I think you should really look at practical ways to increase your income today so you have an easier time qualifying for loans in the future. Can you take a second job?

Stephanie P. · Answer

You don't need your friend to co-sign and you don't need to cross collateralize any other properties.  Get a DSCR loan and do it yourself.  You don't need your W2 income but the property has to qualify meaning the rent has to cover the mortgage.  A duplex would be perfect.

Sanat Bhandari · Answer

If you're looking for an agency (Fannie/Freddie) type loan (whether owner-occupied or investment), they won't allow your friend to cosign with you since it has to be a close relative for the same

If you're looking to cross-collateralize your other assets, a local bank/credit union is your best bet since they can be flexible when it comes to specialized financing situations like this

Since your friend is willing to cosign, I'd say form an LLC with both of you as members. Get a DSCR loan that won't show up on your personal credit since it can close in the business name with both you guys personally backing it. That way, your friend gets to be the cosigner and none of your incomes will be used to qualify you for the mortgage. Icing on the cake is that since both of you have good credit, you'll likely get the best DSCR rates out there

What should my approach be given my situation?

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