Question about investor friendly lenders

[James Hall]

Has anyone else noticed that it seems that the people who have the least understanding of money, investing, and profit and loss are bankers???

Seriously though, we own 17 rental units; a five plex, a four plex and a house with 6 cabins on a single property in Eastern Washington. We also own a single family home in NC. The 16 units in Washington are all on owner finance notes at 7%. We also have a 50k note with a private investor at 9%. 

Our cash flow is actually great. Right now, despite the fact that several of the units are still far below market rental, our net income is around 3K per month. (not counting our Home Depot credit that is temporary and will be paid off in a few months). I approached Washington Federal and met with one of their loan supervisors who was giddy at the possibilities, yet a few days later she said they were giving us a no stating that the numbers didn't work. She said the properties are not profitable. 

The only possible way that they could claim that the properties are not profitable is to discount the fact that, in the 2 years we've owned them, we haven't taken a dime from the properties. We have sunk tens of thousands of dollars into upgrades and repairs to make the properties nicer. Yes, we still have a long way to go but they are lightyears better now than they were when we got them. I even made a 3 page list of unit by unit repairs and upgrades that have been done and gave it to the banker. We even had our real estate agent do a current market analysis and she believes the properties are worth 150k to 200k more now than when we bought them. 

So, my question: any ideas on a better banking/financing options?

[Kevin Romines]

Even I will say that most loan officers and most lenders are not set up or don't fully understand how to correctly calculate the income and have all options available to you. As @Sasha Mohammed had said, most banks are set up for and designed for owner occupants. They tend to be less knowledgeable about how to handle rental income when there is much more than 2 rental properties. 

I will do my best to break it down for you. On the Conventional (Fannie Mae / Freddie Mac) side of things, there are 2 ways to calculate rental income. If the rental you have, is not showing on a tax return just yet (you bought it after your last tax filing) then the calcs. look like this: 

Gross rents X 75% minus PITIA payment. If the number is negative, you add it to your liabilities. If the number is positive, you add it to your income. 

If it shows on your tax returns then we do the calcs off the taxes. That goes like this:

Again if the number is a positive number, then its added to your income. If its a negative number, it gets added to your liabilities. If at that point you cant debt ratio at 50% or less of your gross income, then you wont be able to do a Fannie Mae or Freddie Mac type loan. So what is next?

After that we look at portfolio loans or what is known in the industry as Non-QM loans. This means they are non-qualified mortgages, unlike the Fannie Mae loans which are qualified mortgages. What does a Qualified Mortgage mean, it means the lender must adhere to the ATR (Ability to Repay) requirements, which means you must fully document all your income and assets and its proven your debt ratio and reserve requirements meet the loans guidelines. 

So what are some of the options on portfolio or Non-QM loans? They range from programs that require full documentation but are more flexible on credit scores and credit events. There are Bank Statement programs, you prove your income through bank statements instead of tax returns. There is the Investor Cash Flow Program. This loan doesn't require you to put any income or employment on the application and will only determine the debt ratio by making sure the rents are equal to or more than the PITIA payment of the subject property. I know of one investor that will now do them if the rents equal 80% of the PITIA payment with a higher credit score requirement. 

The reserve requirements on a portfolio loan or Non-QM is generally much less than Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac limit you to a max. of 10 financed properties, however Non-QM is unlimited financed properties. Non-QM will allow you to finance in the name of a LLC with a personal guarantee. Fannie Mae just changed their rules a year ago that allows you to transfer the loan from your personal name to an LLC that you are the majority member of, without it causing the due on sale clause to kick in.

There is so much more to understand beyond what I can talk about here, without writing a novel. The reason most loan officers don't fully know all these guidelines and understand how to work with investors is that their business is not built to accommodate investors. So they know some of the rules and options, but may not know enough to do more complex deals in a timely manner. Or they just don't want to work in that arena, their business model is different. That's okay, but may not be the best choice for someone that is set on deriving their income and wealth through real estate.

I hope this helps?