Debt to Income Ratio Holiday Blues

[Eric Zawadski]

I have read other threads like this but I still can't seem to figure out what to do...

I have 3 rental units. They all cash flow $300-$500 a month. Each tax season I input all of my income and my deductions/repairs/expenses/etc. By the end of it I don't have any taxable income from my rental properties, only the small income I get from being a seasonal park ranger. 

I have read on these threads that a small bank or credit union, one that keeps loans in house, will look at the cash flow numbers of the investment and not at my taxable income, or lack there of. Yet, just moments ago, I got an email from my mortgage loan officer saying that my debt to income ratio was too high and they won't be able to move forward with approval. 

This has happened a few times now and I solve it by asking my parents to co-sign. I'm a responsible 32 year old and this feels a bit odd each time I do it, but it gets the job done.  I'd love to move forward on my own though.

How can I change this? How do others, that have real estate as their main income (with minuscule taxable income) make this happen?

[Chris Mason]

Assuming the rentals are ballpark cashflow neutral, your DTI will come down to approximately:

1) Your personal "day job" income. Increasing this will improve DTI. If you want to get your parents off the hook, you may want to consider moving to full time.

2) Your personal housing expense. Reducing this will improve DTI. This is your personal home's PITI or the full amount of the rent specified on the lease you have signed.

3) Your consumer debt obligations, car payments and the rest. Reducing these will improve DTI.

4) The rental income of the property you are buying offsetting it's own PITI. This one is important, a LOT of residential loan originators will not include this, even though the guidelines clearly allow it. This is niche territory, like reverse mortgages, or spinal surgery (you wouldn't ask a general family doctor for spinal surgery would you?).

"I have read on these threads that a small bank or credit union, one that keeps loans in house, will look at the cash flow numbers of the investment and not at my taxable income, or lack there of. Yet, just moments ago, I got an email from my mortgage loan officer saying that my debt to income ratio was too high and they won't be able to move forward with approval."

A few things are being conflated here. True "cashflow only" type loans come in two broad varieties:

1) Commercial financing. Regional bank or credit union is the right tree, but you're barking up the wrong branch. You don't want to be talking to the residential LO, it's a totally different product line. Talking to the residential LO for commercial financing is like walking onto a vanilla Ford car dealership for an 18 wheeler, or talking to the solar panel salesman for a nuclear power plant you want to build. Ask to speak to a commercial loan originator. 30YF will typically not be around, ARM with a 20 or 25 year term is what to expect. DSCR 1.25% is the norm, which might be hard with the shorter loan term. These guys strongly prefer the $1.5m apartment complexes, but there's no law that says you can't get a commercial loan on a 1-4 unit investment property, it's just not super common practice for people with only a few properties.

2) Residential "non-qm" financing. This will be from your local mortgage bank (Guaranteed Rate, loanDepot, to name a few) or a local independent mortgage broker (I'll spare you the plug, I'm sure you can divine which route I'd suggest). 30YF is still around here, but the rate/fee combo will be higher. DSCR of as low as 1% is out there, with risk-based rate/fee adjustments.

In either case, they close slow as all hell, preapprovals really aren't a thing, note that we're talking DSCR of the property and not DTI of you personally, you need to have the property in escrow before it can be evaluated for a go/no-go ("cashflow only" MUST be property specific, by definition), which in turn means vanilla residential Realtors (at least in the SF Bay Area, which is what I can speak to) are going to be hesitant to show properties. Because of this, you will have an easier time with a FSBO who doesn't have a listing agent telling them to throw your offer in the trash since these other 5 or 15 offers have buyers that are preapproved.