BRRRR lending DTI question

[Spencer Harvey]

Hello,

I'm currently in the process of trying to add a rehab property to my portfolio and use the BRRRR method on it. I have a HELOC on my primary residence that I plan to use as the 25% downpayment, then finance the rest of the initial purchase price with a conventional mortgage (already preapproved). I plan to use the remaining balance of the HELOC to fund the rehab, then refi the property after the 6mo wait and hopefully pull out the majority of the money, pay back the HELOC, and repeat.

It was recently brought to my attention that if my 2018 tax return shows a "loss" for the other two rental properties I currently own, I may not qualify when the lender runs their numbers for the refinance after the rehab 6 months down the road. I have my tax returns mostly complete, and show roughly $10,000 loss between the two properties, but in actuality both properties cash flow slightly above the 1% guideline. 

Since this will likely be the case, the lender suggested I wait to file the returns and try to rehab and refi the property before tax returns are due. I'm not sure I would be able to complete that in time. 

Here is my plan of what I'm trying to accomplish 

-purchase $100,000 house (25% DP from HELOC = $25k down)

-rehab for $20k with funds from HELOC

-new appraisal, ARV around $150,000

-refinance to 30yr fixed, pull out majority of rehab/dp, pay off HELOC balance, repeat etc.

Are there any other options I'd have available as far as obtaining a new loan at the ARV if I would no longer qualify for a conventional mortgage? Commercial loan?

Any input would be appreciated!

[Andrew Postell]

@Spencer Harvey

1. This would depend on what TYPE of loan you are using.  If you are using a Fannie/Freddie loan you should ONLY be using lenders that allow 15% down.  Fannie Mae and Freddie Mac both allow 15% down on SINGLE FAMILY HOMES (2-4 units are different). I'll give some tips below on what questions to ask for this type of loan.  But if you are using a portfolio/commercial type of loan then it can be ANY types of rules.  Since portfolio loans come from the bank's own portfolio of money...their money if you will....then each bank could have entirely different rules than other banks.  It can certainly get confusing because you would have to call each and every bank to find out the rules to their own portfolio loans.  Some banks might be the same and some might be totally different.  So if you need a portfolio/commercial loan that requires less than 25% down I would suggest posting in the state forum here on Bigger Pockets that the home is located in to see if some locals can point you towards some good lenders.  Maybe they might be able to point you in the right direction.
2. Now, a good lender should be able to review your tax returns WITHOUT running your credit.  It's pretty easy for a front line loan officer to be able to do the math here.  Seriously, it should take about 10 minutes of math.  Really easy.  And it does not require a credit pull.

As I mentioned above we should only be working with investor friendly lenders with Fannie/Freddie loans.  It might be hard to know who is better than others so I came up with 7 questions for you to ask lenders when you interview them.  If they can answer these then you are in at a good place:

Questions for Lenders

1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
2. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
3. What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
4. Can I change title to my LLC?
5. Do you sell your mortgages?
6. What is your loan minimum?
7. Can you explain to me what your reserve requirements are?