How do I look in the eyes of a lender? SFOO Buyer and Holder

[J R Spikeston]

I never planned on being a landlord, but looking back over the last decade I've settled into the pattern I explain below. My main question is, "How will I look in the eyes of a lender when it comes time to buy my fourth property next summer? What type of lender/loan should I look for?" I would love to be strategic, looking at it through the lens of a long-term investment and not just a place to live that I might later rent out.

I buy a modest single-family 3/2 (on a conventional 15-year fixed), DIY rehab it while occupying, usually house-hacking via roommate(s). After a few years, I move somewhere else and rent it out.

Next summer, my "portfolio" will be:

House 1 Worth: $185,000 Owe: $63,000 Equity: $122,000 PITI: $1620 Rent:$1620 Cash Flow: $200

House 2 Worth: $250,000 Owe: $79,000 Equity: $171,000 PITI: $1250 Rent:$1800 Cash Flow: $550

House 3 Worth: $120,000 Owe: $92,000 Equity: $28,000 PITI: $1050 Rent:$1350* Cash Flow: $300

*This is an estimate. I currently occupy this property.

If I accelerate this pattern only slightly, I have it mapped out to own 10 paid-for properties worth about $2.5 million by age 51 (coincidentally my retirement age from public school), cash-flowing about $20,000/month.

Houses 1 and 2 exceed 2 years of documented rental income. If I get a signed lease on House 3, can I count that income when applying for a mortgage for House 4? I've heard different things about how some lenders consider 80% of your cash flow and how some look at LTV instead of DTI.

Notes: I have no non-mortgage debt except student loans of about $120,000. I'm on IBR and pay $260 a month, but it seems some lenders count 1% of the principal ($1200!) instead of the actual payment. (These loans are slated for PSLF in 2026.) For what it's worth, I'll be 35, single, living in Texas. My W2 job (public school administrator) is below the median income (about $50,000). Credit score 750.

[Jerry Wamsley]

Usually an agency lender FNMA/FHLMC (Fannie/Freddie) are going to look at a couple things when considering your income.

1) They will look at tax returns for the last two years and account for any rental income that is claimed.  This should assist in offsetting the existing mortgage payments you have had in play.  If the property is new/being purchased refer to #2.  They will also look for deductions outside of depreciation and subtract that from any income off lease agreements.  Lease agreements and income from tax returns should run parallel.

2) They will also look at a comparable rent schedule provide by the appraiser which tells them what the rents are for that property.  This will offset any property you are buying in an equal to 75% of the projected rent amount.  You will be charged 25% of expected rents as vacancy potential.  This will also be done with existing non owner occupied rentals and credited accordingly unless you have been writing off rental income with repairs, etc.  RE depreciation on rentals should be added back into income off tax returns.  

3) Finally, reserves Cash to close will be a minimum of 15% for agency financing (FNMA/FHLMC) with mortgage insurance. For 680-719 median credit score, agency requires 6 months reserves on all mortgages (6 mortgages at $1000 PITI a month would require $36,000 in liquid assets bank, stocks, money market, etc. after closing e.g. 15% reserves down use $100k p/p as an example, plus $36,000 in bank plus $15000 and any closing costs you are paying. Now, if you have a score of 740 the reserve can requirement can be cut down to $18000 plus $15000 and any closing costs, prepaids you are paying.

***Reserve limitations vary from lender to lender which are called overlays.  Freddie does require less than Fannie.  Easiest way is to work with an originator that has direct access to AUS (Automated Underwriting System) as well direct access to underwriters since most lenders like to have an electronic approval before approval.