brrrr refi help please

Private Lending & Conventional Mortgage Advice
8yFollow

brrrr refi help please

Skyler Mckinney
Flipper/Rehabber · Virginia Beach, VA · Member since 2018 · 95 posts · 65 votes

So I am looking for a house to brrrr and I decided to be responsible for once instead of just jumping into something and made sure that I would be able to refinance out of a deal before I jumped into some hard money I wouldn't be able to escape from. I called the two banks I have relationships with and they both told me that they take debt to income into consideration when doing the refinance. I own a primary residence and a couple cars that put my DTI at over 50% and would not be able to refinance. I have done some research and I'm just wondering if there's something I'm missing here. How am I supposed to refinance if I don't qualify for it? Is there a specific loan type I should be using or a specific bank I should be using. Please help as I was planning on starting my real estate investing career with a BRRRR so I would have money to fund my next deal. I'm not opposed to just flipping but it's not a good idea without an exit strategy.

0Reply
10 views

Most Popular Reply

Kevin Romines
Lender · Winlock, WA · Member since 2013 · 1k+ posts · 1k+ votes
8y

Not sure what the other banks are doing but it sounds like their guidelines or overlays are really strong and prohibitive of doing certain kinds of business? What I mean by that is that your refinance is most likely going to be with a Fannie Mae or Freddie Mac  program, if you want the best rates and terms. With that said, Fannie Mae and Freddie Mac will allow you to use rental income from the moment it begins. Even if the property is vacant, you can still use the rental income of that property as the lender will get that info. from the appraisal (rental comp. analysis)  that is being done for the refinance. See the image below for the actual Fannie Mae Guidelines. 

A properly structured BRRRR property is designed to give you instant equity once the rehab is done, its also designed to cash flow much better than buying a home that needs no repairs and is rent ready. So if the calculations are done correctly on these deals, they should be throwing off as much as several hundred dollars per month in cash flow?

The best practice is to know the formula that Fannie Mae uses in determining rental income. And that formula is (Gross rents X.75% Minus PITI = Net profit or loss) so lets use some numbers in that calc. (Gross Rents 1500.00 X .75 = 1125.00 Minus PITI of 1000 = Net profit of 125.00). If the number is a negative number, then it gets added to your debt ratio. If the number is a positive number, then its gets added to your income.

In most cases, the average rental will not add much to a persons debt, but it could a few hundred to the income as well? So with proper planning, you can identify houses that will meet the criteria and after careful calcs, will add dollars to your income column and not add them to your debt column. 

Find a lender that doesn't have any overlays on Fannie Mae's guidelines for counting rental income. Sit down with them and discuss your plans and work through the details in advance. Then when you feel that you have identified a property that calcs. out well, shoot that property to them with the estimated ARV and estimated rents and have them run the refinance scenario on that home. If you end up good, then go forward. For Loan Officers that like to work with investors, and not all do and not all are familiar with the basic calcs and how to properly do them, you will then have a strong player on your team that can deliver the kinds of refinances you will need on all your deals.

Lastly, When considering a BRRRR you always want to have 2-3 exit options. Option 1 - Rent it out. Option 2 - Sell it and get the profits. Option 3 - Lease Option it out - Get the option money, get a higher than market rent, and get a higher than today's value on the sales price of the home.

I hope this helps?

11Reply
See this reply in the discussion

19 Replies

Jump to latestLatest
  • Dan Barli
    Attorney · Clifton, NJ · Member since 2015 · 1k+ posts · 328 votes
    8y

    @Skyler Mckinney it's great that you did this leg work up front and didn't just jump in without your exit strategy lined up. You aren't missing anything. You need to have a lender that will approve you for a refinance in place before you pull the trigger, or as you said, you will get stuck in a deal that you can't get out of. What appeared to have been a lucrative BRRR could end up costing you a lot of money if you don't have the refinance part locked down. Keep plugging away and speaking with other banks until you find one who can do it. Or keep working on paying down your cars and other debt to get under the 50%.

    1Reply
  • Eduardo Rodriguez
    New Braunfels, TX · Member since 2018 · 19 posts · 10 votes
    8y

    you could rent the place for 6 months until its "seasoned" and the bank will not hit you with that mortgage, after the refi- you can keep or sell. I am having the same issue, the bank wants to commit half the cash-out money to pay off a car loan to qualify.

    1Reply
  • Bob Floss II
    Attorney · Northbrook, IL · Member since 2017 · 719 posts · 549 votes
    8y

    @Skyler Mckinney Try a few different banks before writing it off. Some banks have very strict lending requirements and they wouldn't be interested in this type of loan.

    1Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    8y

    Sell a car? Depending on how much it's worth that could greatly help your DTI ratio. Call/talk the bank afterwards and see what changes.

    2Reply
  • Kevin Romines
    Lender · Winlock, WA · Member since 2013 · 1k+ posts · 1k+ votes
    8y

    Not sure what the other banks are doing but it sounds like their guidelines or overlays are really strong and prohibitive of doing certain kinds of business? What I mean by that is that your refinance is most likely going to be with a Fannie Mae or Freddie Mac  program, if you want the best rates and terms. With that said, Fannie Mae and Freddie Mac will allow you to use rental income from the moment it begins. Even if the property is vacant, you can still use the rental income of that property as the lender will get that info. from the appraisal (rental comp. analysis)  that is being done for the refinance. See the image below for the actual Fannie Mae Guidelines. 

    A properly structured BRRRR property is designed to give you instant equity once the rehab is done, its also designed to cash flow much better than buying a home that needs no repairs and is rent ready. So if the calculations are done correctly on these deals, they should be throwing off as much as several hundred dollars per month in cash flow?

    The best practice is to know the formula that Fannie Mae uses in determining rental income. And that formula is (Gross rents X.75% Minus PITI = Net profit or loss) so lets use some numbers in that calc. (Gross Rents 1500.00 X .75 = 1125.00 Minus PITI of 1000 = Net profit of 125.00). If the number is a negative number, then it gets added to your debt ratio. If the number is a positive number, then its gets added to your income.

    In most cases, the average rental will not add much to a persons debt, but it could a few hundred to the income as well? So with proper planning, you can identify houses that will meet the criteria and after careful calcs, will add dollars to your income column and not add them to your debt column. 

    Find a lender that doesn't have any overlays on Fannie Mae's guidelines for counting rental income. Sit down with them and discuss your plans and work through the details in advance. Then when you feel that you have identified a property that calcs. out well, shoot that property to them with the estimated ARV and estimated rents and have them run the refinance scenario on that home. If you end up good, then go forward. For Loan Officers that like to work with investors, and not all do and not all are familiar with the basic calcs and how to properly do them, you will then have a strong player on your team that can deliver the kinds of refinances you will need on all your deals.

    Lastly, When considering a BRRRR you always want to have 2-3 exit options. Option 1 - Rent it out. Option 2 - Sell it and get the profits. Option 3 - Lease Option it out - Get the option money, get a higher than market rent, and get a higher than today's value on the sales price of the home.

    I hope this helps?

    11Reply
  • Tyler GibsonBusiness Member
    Real Estate Agent · Orlando, FL · Member since 2017 · 1k+ posts · 2k+ votes
    8y

    @Kevin Romines Your response is pure gold. I have been looking at doing something like this but have had some questions that are holding me back. Your response has been enlightening really appreciate it. 

    [email protected]407-590-9858
    GPG Team 596 Reviews
    WebsiteView Page
    4Reply
  • Skyler Mckinney
    OP
    Flipper/Rehabber · Virginia Beach, VA · Member since 2018 · 95 posts · 65 votes
    8y

    Thank you guys for all of the replies and help I'm not going to let this hinder me I was more so wondering what other people have done in this situation or have encountered it before. @Jaron Walling  I can't get rid of either of the cars ones a lease that my wife drives that will be up in a couple months and in a bad decision-making frenzies just purchased mine but there's a lot of negative equity in so it would be a pretty big loss. @Kevin Romines Thank you so much for the detailed response you helped me understand what the banks are looking at and how they are determining rental income. If you don't mind me asking how do I go about finding a loan broker who is investor friendly? I'm going to defiantly try and get in contact with one so I can everything pre-arranged before I jump into a deal 

    1Reply
  • Skyler Mckinney
    OP
    Flipper/Rehabber · Virginia Beach, VA · Member since 2018 · 95 posts · 65 votes
    8y

    @Eduardo Rodriguez My only problem with that is the expiration on the hard money loan. The lender I was talking to do one-year loans only and that's cutting it pretty close to that timeline. But thank you for the suggestion 

    0Reply
  • Eduardo Rodriguez
    New Braunfels, TX · Member since 2018 · 19 posts · 10 votes
    8y

    just keep knocking on doors and making phone calls, I finally got a good deal to sink my hooks in to and have your same issue, in the middle of a refi-cash out to buy this other property and the bank is throwing a wrench on the deal by asking me to pay off a car note to make the 51%DTI ratio. this bums me out but will keep pushing on until I get financing secured to nab this other property, maybe hard money to buy/fix and rent ( I am trying to avoid doing this), or maybe 203K loan, there are too many options, you need to exhaust all possibilities until you get one that fits. good luck brother.

    1Reply
  • Kevin Romines
    Lender · Winlock, WA · Member since 2013 · 1k+ posts · 1k+ votes
    8y

    @Skyler Mckinney Well I would look at all the ads/websites in your area for mortgage lenders and see if any of their sites comment on real estate investor or rental programs. You call just pick up the phone and call as well. 

    But the way I would recommend the most would be to call a couple of local title companies and ask for a referral on the lenders and loan officers that close the most rental property loans. If you see certain names coming up more frequently than others, that would be your top pick?

    1Reply
  • Taylor G.
    Rental Property Investor · Haverhill, MA · Member since 2016 · 6 posts · 7 votes
    8y

    @Kevin Romines This has been great advice! I've been searching and trying to learn more about the refinance benefits and how to tackle lenders. Thank you for explaining so clearly. 

    1Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    8y

    It might make sense to try to pay off some of that debt first to improve your DTI. And of course, each bank is different, so you could look for another bank to see what they say.

    Podcast Guest on Show #121
    1Reply
  • Tristan Colborg
    Real Estate Broker · Commerce City, CO · Member since 2018 · 107 posts · 55 votes
    8y
    @Kevin Romines This post was so helpful for not only the OP, but for someone like me who wants to use this strategy as well. Is the 75% of gross rent used by Freddie Mac to help account for expenses before they look at DSC(think that's the right term)?
    1Reply
  • Eudes De leon
    Member since 2018 · 17 posts · 3 votes
    8y

    I got stuck on a deal like this I purchase a property it was a very good deal unfortunately because of my debt to income the bank will not lend to me to refinance . What I did was I explained  to a family member the hours of stuck on this deal  and I asked him  to lend me money  from his  line of credit I paid some of my dead  with that money . One month later I went to the bank again my debt to income was where the bank wanted to be a I got the refinance and I pay my cousin back . Maybe you could do the same with a family member or friend  or maybe a hard money lender and just get money to pay some of your debt down  wait a month into your credit  clears

    1Reply
  • Cisco Hood
    Rental Property Investor · Phoenix, AZ · Member since 2017 · 41 posts · 7 votes
    8y
    I been following this thread and I much appreciate all the helpfull replies, my question to add to this is what exactly does the DTI needs to be at or under to refi out of a hard money loan? I too am in the planning stages of buying a second property to brrr via hard money. I'm reading 36% DTI in some places and 42% in others. Can anyone clearify.
    1Reply
  • David Augustyn
    Antigo, WI · Member since 2016 · 13 posts · 2 votes
    8y

    Have you asked if there is a difference if you used an entity like an LLC?

    My bank bank sends LLCs through the business financing department where they deal with seasoning rather than DTI.

    1Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    8y

    @Skyler Mckinney , read this post from the BiggerPockets Blog by @Alexander Felice .  https://www.biggerpockets.com/renewsblog/work-with-lenders-brrrr-method/

    The last time I was in Vegas, we met for breakfast and he walked me through this. Can't wait to find a property that I can do this with...

    [email protected]Podcast Guest on Show #261
    BiggerPockets
    1Reply
  • Skyler Mckinney
    OP
    Flipper/Rehabber · Virginia Beach, VA · Member since 2018 · 95 posts · 65 votes
    8y

    Thank you, @Mindy Jensen for the link it was very helpful. I did, however, find a lender that was willing to work with me If you would like the contact info feel free to PM me. Thank you, everyone else for all of the suggestions and help I sincerely appreciate it!  And @Kevin Romines your suggestion worked for me I called a couple title companies and they gave me a couple names, Thank you so much for your long detailed post. 

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free