HELP - we can’t get approved…. Or can we?

Question

My boyfriend and I are trying to buy a property in the Sacramento, CA area. We’ve gone through the process of doing an application and submitting the required documents, and our lender is saying our combined income is too low, even with a significant down payment.

The details:

I alone own a property and would like to rent it out and buy single family with my boyfriend. I make around $47,000 a year with a W2 job. I have a car payment as well and around 10k in credit card debt. So my DTI to buy another home is not looking very good.

My boyfriend does not own any real estate, but has owned a previous home for over 15 years. He owns his own business and writes off a significant amount. Before writing off, he makes $109,000 yearly. But afterwards, makes around $20k……

We both have credit scores in the 760 range. My question:

How could we ever buy another house with our tricky situation, and still keep my current house for rental income? Our lender suggested we just sell my home as it holds around 300k in equity, but my real estate investment brain is telling me not to, and hold out until I can make this work.

How do investors get approved for and acquire multiple properties at once?

Thanks in advance!

Bill B. · Answer

1) BE CAREFUL. You truly wouldn’t believe what percent of GF/BFs don’t end up spending the rest of their lives together. Figure out your plan if you hate each other 2-3 years from now.

2) You talked about a significant downpayment and then say you have $10k in credit card debt. Pay that off today. It’s costing you thousands of dollars post-tax plus wrecking your DTI.

3) sell your current home tax free and buy a duplex or fourplex.

4) AGAIN: figure out the ownership structure and the breakup structure. If you put down $300k on this new property you’re going to feel pretty bad if you break up and he wants half. Good luck.

Kevin Sobilo · Answer

@Natalie P., a couple things to consider.

1. Is your bf really making $20k? fudging write-offs or collecting income under the table comes to bite you in the a@@ when it comes to financing whether that is personal or business. He likely can't grow his business without financing and he will have trouble getting financing if the business looks that poor on paper.

2. Is his business writing off depreciating equipment? For example, did he buy a business vehicle that he depreciates on his taxes over time? If so, I believe the lender should not be counting this kind of deduction against him. So, perhaps his income should look larger. Not all lenders are great with these kinds of situations.

3. Selling your house could be SMART if you have a healthy capital gain. You claim $300k of equity. Lets assume you could sell the home for a $200k profit over what you paid. If you rent the property and make it an investment you will pay tax on that! If you sell now while its still considered a primary residence you will NOT pay tax on any of that! Its considered a primary residence if you lived there 2 of the last 5 years.

That is a healthy amount of money to save in taxes. You can always invest some of the proceeds in more property.

4. Often times a primary residence doesn't make a great investment rental property. So, evaluate whether it does objectively versus what else you could invest that equity towards and what return that would get you.

Natalie P. · Answer

Hi everyone!

Wow! Thank you all so much for the helpful information. It has certainly given me more to research and think about. I’ll be going back to my loan officer to see if a 12 month bank statement program would work for getting us qualified. I also think I’m going to knock out the debt I have hanging around to lower my DTI… and hopefully those two things combined will help us qualify!

For more context, my current house and primary residence with the large amount of equity, was inherited, and I feel like holding onto it and renting it out would be a great opportunity as the interest rate I have is really low (4%), making it a really good potential cash flow opportunity.  Also  for even more context, my boyfriend and I have been together for almost 10 years and have a 15 month old. So yes, this is for the long term ;), but I agree, it’s always smart to plan for the “what if” just in case!Thanks again to the Bigger Pockets fam I greatly appreciate it.

Theresa Harris · Answer

How much is the interest rate on your current home?  Also did you ask the loan officer why you are falling short?  ie would paying off the $10K in credit card debt put you in a better position?  $10K is ~25% of your annual income, so combined with the mortgage and car payments, you won't have much borrowing power.

Find out if the bank really would lend you money if you sold your current home. Last thing you want is to sell your house and then not be able to buy another one.

Sara Klaus · Answer

Hi Natalie! I just wanted to add one other piece of advice here that I didn't see mentioned. It's possible your loan officer had factored this in already, but you will typically need to have a signed rental agreement in order to show that your existing property should not count against your DTI. If you won't be renting to someone you know, it can be difficult to get this as you're transitioning into a new property (hard to sign a rental agreement, if you don't know when the property will really be ready). I would ask your loan officer if they had factored in the funds coming in to offset your existing mortgage. If they haven't, verify that a signed lease agreement will be counted towards your income. From there, I'd recommend reaching out to some of the smaller property management companies in your area. They will have lists of people that have been looking at THEIR rentals and may be willing to help advertise yours for a fee (assuming you want to manage it yourself). There are also a few community loan programs in Sacramento that would help you qualify with lower income. You'd want to connect with a local broker on that front, but a few of them have programs based on the census-tract you're either selling or buying in. Let me know if you need to bounce any questions around! Always happy to help.

Scott Scoville · Answer

Hey Natalie,

I'd be happy to put you in touch with a couple of brokers. DTI is a common challenge that we all face, however, it sounds like you need a lender that is going to help you look at the overall situation and give advice as to the best course of action. Be happy to chat over the phone if you'd like. Best of luck!

Alecia Loveless · Answer

@Natalie P. Always, always, always have an EXIT strategy and it’s best to get it in writing as a contractual document.

That being said if your new purchase will cash flow then I would recommend Brandon Turners new mortgage platform betterlife.com/ref.

It seems to offer both conventional loans as well as DSCR loans which you can get based on the income of the property.

Erik Estrada · Answer

It sounds like you may benefit from a 12 month bank statement program. Lenders will allow both W2 income and self employment bank statements to qualify. In terms of qualifying income, lenders will use 80% of business deposits and 100% of personal deposits and use your full W2 Income. You do need to put at least 15-20% Down and the max DTI will be at 48%.

The new primary home also has to be bigger or better to qualify.

HELP - we can’t get approved…. Or can we?

Most Popular Reply