Is my mortgage broker right? I won't qualify for 2nd home? Why?

Question

My wife and I purchased a SFR in San Diego, CA in 2015 with an fha loan. Appreciation has been great and I've refinanced out of that loan to a conventional loan and opened up a HELOC with 58k available.

We want to move on to a new place but keep our current home as a long term investment. We view our current property as a long term hold for several reasons.

We want to grow our portfolio and have identified a couple duplexes or even smaller single family residences in better neighborhoods, but my lender has told me that I won't qualify for fha or lower than 20% down programs because it won't make sense to the underwriter that we are moving to a smaller place. We're looking at places between $550k - $625k.

In the case of the duplex she said I would not qualify because they wouldn't be convinced that we would live in one and rent the other. Additionally there would be some hurdles using the rental income from my current home towards my dti since I would be using the heloc for the down payment on the new place.

I don't understand the logic. Besides the fact that we actually are going to live on the property and not just use it as a rental, doesn't it make sense that people would sacrifice square footage for a better neighborhood, better school districts, less commute, better quality of life...etc?

Has anyone else had a similar situation and been able to purchase the 2nd home with owner occupied financing? How did you do it?

Do you have any advice or insight?

I'm trying to get my brrrr on but they're not making it easy!!!

I would greatly appreciate any feedback.

Amy Kendall · Answer

I think you are running into two problems here. First, the R in BRRRR is for, "refinance," and not use a HELOC. As far as I am aware, most banks do not like to do a HELOC on an investment property that still has a mortgage, which is what your primary residence will become. Second, I agree with @Lee Ripma that the banks would have a hard time not believing you were actually moving if you had a signed lease to show them. If that doesn't work out, you could move out to a temporary place, rent out the house and then there is no longer a question.

Todd Dexheimer · Answer

Try calling your local banks to get a commercial loan. When you call the bank as for a commercial mortgage lender. Then talk with him/her about your plan with buying duplexes and financing them in your business. Commercial lenders will care about your DTI, but they will also look at the property as income, where the traditional lender will look at it at more bad debt. You may need to call a lot of banks, but don't give up. I will call every single one of them until within 30 miles until they all said no. I did that in 2009 (several said yes)

Lee Ripma · Answer

@David WestI'll chime in here, even though I don't invest in San Diego, only out of state. Since you'll owner occupy you could try a lower down payment conventional loan. I know that loan depot has an owner occupant 5% down loan without PMI but the interest rate is a little higher. To overcome some DTI issues you can find a willing friend who will sign a lease with you for your current residence. You can then count 75% of that lease amount towards your monthly income. In high priced markets like ours I've heard realtors suggest this, warning it's technically it's cheating, but you are going to rent it out. There are also 10% down vacation home loans that also don't have PMI but have higher closing costs, might work. I was thinking about doing one for a place in Mammoth Lakes. I know others may disagree with this approach, but I rent in San Diego and invest in rental properties out of state. It's a bit hard being remote but I'm getting good systems setup now. The nice thing about doing investments out of state is that they are always setup as investments. Just my approach to the high prices in SD!

Chris Mason · Answer

Hi @David West,- Be careful with the term "second home." To the mortgage industry, "second home" means what a normal person means when they say "vacation home." A lot of miscommunication occurs because of this. It doesn't look like that happened here, but just a warning to the lurkers. :)- FHA isn't just for FTHB, but it's also not designed with investors in mind. There are narrow provisions wherein departing residence rental income can be used, but you didn't describe any of them. Generally you must earn enough day-job income to support both mortgages, though rental income from the multifamily unit being purchased will move the needle a little bit.- You can purchase an owner occupied duplex with 15% down, counting both the departing residence rental income and income from the other unit.- That part is usually actually pretty easy to overcome, for the reasons you highlight pertaining to neighborhood, etc. Some underwriting teams are more liberal than others, which is something you can't quantify, but certainly something I checked for when employer shopping. - If you want to stick to the SFR world, the "nomad strategy" of buying SFRs @ 95% LTV, using conventional financing with temporary PMI, over and over and over again is certainly viable, and friendly with Agency mortgage guidelines. Prop 13 paired with fixed rate financing generally means that eventually all real estate in California will be cashflow positive (unless the town gets Detroit'd), so you live there and improve/enjoy the property until that happens, at which point you "nomad" your way into the next home, building up a happy little empire that you can pass onto your children (along with your Prop 13 tax basis) along the way. You might get lucky and it's 12 months on one home, or you might get particularly unlucky and it's 10 years on the next one. I'll probably never personally sell any California real estate I personally live/lived/etc in, for this reason (but everyone reading this needs to sell, so my clients have something to buy, LOL). Simultaneously, you can certainly have other investments (incl. real estate) and business ventures going on, of course.

Shaun Weekes · Answer

This scenario to me personally makes sense.You no longer have and FHA loan and if you have kids or are planing on having kids a better school district is better for your children's future. Also a better school district normally means a safer neighborhood etc. I would recommend changing your current loan to an investment conventional loan if your DTI makes sense.So the scenario makes sense. Now the wild card is going to be your income which we don't have enough information on. You'll need to have enough equity in the departing residence to count the income.To me personally this is an income issue not a scenario issue.A strong letter of explanation will be sufficient in my opinion scenario wise.

Upen Patel · Answer

If you don't have any other property, then you can do a 5% down Freddie HomePossible loan. Else the min down would be 10%. This is for owner occupied only.

Upen Patel · Answer

@David West Your lender is correct. This is has got nothing to do the underwriter. The underwriter is simply implementing the guidelines from FHA.

David West · Answer

Account Closed I agree, I may have to bite the bullet, stack up enough for the bigger down payment but it does slow down the process. I really want to move into multi family and scale up. I'm going to check with some local portfolio lenders and see if they can make it happen. It's hard to believe that everyone else investing in expensive markets are all putting down 6 figure down payments. Thanks for the response.

Scott Miller · Answer

Get another mortgage broker ASAP! You would be apply to consider the rental income from the one that you move from in qualifying for your new home mortgage. It happens all of the time. Those terms are typically set by our buddy FANNIE MAE on a national basis even in those pricey California markets. As an aside, I'd recommend that you find your local NONPROFIT real estate investors association and go to a meeting. Their business associates have mortgage lenders that specialize in addressing this situation all of the time. Go get 'em, Tiger!

Amy Beth · Answer

Perhaps you can cut down your expenses to the bare minimum and work on saving up for a down payment. The fact you are relying on a HELOC for a down payment is probably why you being denied. If you can't cut expenses enough to have extra for a down payment, pick up a side job to earn extra income. It will delay your move but by increasing your income and savings you will then be able to qualify. A higher income will also increase your chances of being approved. Also make sure to have cash reserves in case your tenant bails and you have to evict.