$1m equity, excellent credit, no income. What loans can I get?

Question

I have a $1m house paid off. 830 FICO.

If I cash out refi, I can easily get a loan for $300k to buy a fixer.

After spending $50k out of pocket to repair, ARV is $500k. I want to further leverage the increased equity from this $500k house.

Let's say I am retired and have no income, but now I can rent out this 500k house for $2100/month.

What is the next loan I'm supposed to get?

With only $25000/year projected gross rent and no other income, can I easily get another 70% LTV cash out refi for the $500k house = $350k low interest loan,  repay the original $300k loan and pay myself back for the 50k renovation cost.

... and then repeat the exact same steps to buy another $300k fixer? and keep snowballing just from the $1m house I have?

Basically I'm wondering if I can get the lowest interest rates with no income... and how lenders calculate how much they're willing to lend me.

John Farley · Answer

I will second Jared's thoughts above. You should look at a stated income program that will qualify based on the properties income not your personal income. The rate will be higher but you will get financed at a reasonable rate.

The rate situation looks like this (from lowest upward):

- Best rate - Show income from a W2 or tax returns that meets a debt to income standard

- 2nd best rate - Show income from bank statements that meets a debt to income standard

- Next best rate - Show ability to repay based on assets. If you have enough liquidity this can be used as the income source for the payments. Typically, you would need liquidity of at least 110% of the loan.

- Nest best rate - Stated income programs that focus on the properties market rate income to calculate a debt service coverage ratio (net income / payment).

- And finally - Asset based loans that only care about the properties as is value. This can be great for the right situation but the rate will be higher and the leverage lower. Also they are mostly not available at the moment (covid related).

Frank Chin · Answer

@Mike Franco

You can argue all you want to the bank. Most banks, including the bank you went to, mostly sell their mortgages to mortgage buyers. They have to meet those requirements. What you have does not meet the cookie cutter profiles needed.

The best way is to find a mortgage broker who can find you a lender that provide loans with your profile, or you go find a portfolio lender, one that provides the mortgage and keeps it on it's books. With portfolio lenders, and you might have some luck actually talking to the decision maker.

Let me tell you what happened once when I went in for a refinancing. Mortgages fell from 15 plus percent in the early 80's to 7.5% in the mid 90's. In 1993, I went to a bank to refi two of the high rate mortgages, totaling over $300K to the lower rates, a reduction of at least 7.5%. I chose not to refi out, to not run into DTI problems, and the monthly cash flow would go up by at least $2,000/month. What happened?

A month later, the one I owned 100% was approved. The other where I own 50/50 with my MIL was hung up. Why? They wanted tax returns from MIL which was provided, but she's retired. Besides the one she owns with me, she owns a few others, some with her son a doctor. With her other rentals included, the DTI exceeded guidelines. Beyond that, they want her son's info, tax returns. Though that might boost income, her son owns rentals with other doctors. So I asked if they need those returns of the other doctors too. What a mess.

If you were some guy with common sense, you would think that if I'm already paying mortgages on time, and the refi increases monthly cash flow by $2K by a simple calculation, it should be a no brainer. Not here.

Fortunately, at the time, I had a private banking account with a major bank, had a chat with my private banker on something else, and this problem popped up. So he said, let us look into it, and I think we can do it. So I said, are you going to ask for tax returns for my MIL, his son, and dozen of other doctors, his real estate partners. My private banker said we don't need all of that, and based on what we have on you, we can go ahead.

This bank just went with my DTI and said the loan can be processed that way.

So, just as in your case, yelling  and screaming about taking on a $350k loan on a $1m property should be a no brainer will not get you the mortgage, any more than my yelling about my cash flow going up $2k/month with the refi falls on deaf ears. In my case, it's a simple calculation they can do themselves. You got to find lenders where your profile fits their cookie cutter requirements.

It's a case of "it is what it is".

Frank Chin · Answer

Some years back, there are such things as "no doc" loans. I have to call around mortgage brokers to get a lender willing to do it, and I manage to get one. But the mortgage landscape has changed and standards are much stricter now.

What you're saying about them being able to "foreclose on a $1m house to get their $300K back" sounds like asset based loans given by lenders to businesses. I worked for a successful trading company that set up an asset based lending subsidiary providing such loans, and the company went bust.

They lend to company with assets to show but comparatively little to no income. Loans are supposed to have a $2m limit. The idea is if the borrower can't pay, just seize the assets, sell it, and get the money back. It didn't turn out that way.

There were several customers who can't pay, but supposedly had vast assets. Can't pay $2m, well, we'll roll it into a $5m loan. Can't pay the $5m, we'll roll it into a $15m loan. The balances rose to $50m each when they realized it went to far. Ok, we'll seize the assets. What happened? The assets values were grossly inflated and many out of date. BTW, investigation of Donald Trumps business empire reveal the same flaws. Could it be inflated real estate values? When the company declared bankruptcy, they had bad debts from 3 customers that owed $50m each.  The company was $150m under water.

I was a RE investor at the time and realized the flaws of asset based lending, mainly because asset valuations are often inflated, or out of date, or both. The best indicator is current income. It was a $350 billion privately held company, 60 years in business, and laid off over 1,000 people when they went under.

Timothy Hero · Answer

Is it your primary home that's worth $1 million, or an investment property?

Timothy Hero · Answer

Is it your primary home that's worth $1 million, or an investment property?

Jared Rine · Answer

@Mike Franco..there are programs that could work for you even right now.  There are stated income investment property loans that can run off light debt service or negative (I know b/c I work with those types of lenders)...but you're not going to obtain the best interest rates.  So it's the compromise, but that shouldn't matter if you're getting great cash flow from your cash out projects b/c your rate of return on those deals should be way higher.  ...But as posted, there are too many factors that need to be considered - someone would need to look at your overall situation and then recommend accordingly.

Calvin Ozanick · Answer

You are really going to struggle with no prior relationships as well as the no income portion. Your best bet is going to be showing some form of income. Otherwise, you will want to rent out the 1m house to build up cash to purchase another property.

Jonathan Taylor · Answer

@Mike Franco

I get this question all the time and there are plenty of ways to acquire properties without a W-2 job or documentable income. RE investors who do it full time can still get loans. As @Frank Chin mentioned ‘no doc’ loans were a Wild West approach years ago but the concept has matured in today’s market.

Lenders don’t lend like they did back in the unregulated days  but lenders use your FICO, assets, experience and liquidity to determine the risk and ability to repay. These are lite doc or DSCR based loans. You won’t get the rates that owner occupied borrowers get but a 30 yr fixed loan in the 6s isn’t bad for a SFR in this market.

Let me know if you have any questions as I’d be happy to help.

Frank Chin · Answer

Oh no, I understand your frustration and I'm not accusing you of yelling.

I bought the rentals back starting in 1983 to 1985. Mortgage rates ranged as high as 18% though I got mine in the 13% to 15% range. Housing prices went up like crazy as well, with my triplex going from 150K in 1983 to $350K by1986. The market topped out in 1986.

Mortgage rates starting dropping and by 1990 it dropped to 10% and I gambled it will drop some more. I'm living rent free back then even at those rates, so I'm not negative cash flowing. I further gambled if it continues to drop, if I refi at 10%, I will eventually have to refi again. I decided to wait. Mortgage rates were 5% in the early 60's and I thought it be heading in that direction.

Sure enough rates dropped below 8% by 1993 and I decided to pull the trigger. Interest expense for $300K in mortgages will drop from the $4,500/month range to $2,200 approximately. I went to my local S&L where I had an account, know the friendly account officer, also has the best rates, and submitted the applications for 2 mortgages. I was thinking like you, how could anyone logically turn it down if I am paying $4,500/month with no problems, and the refi would reduce the interest expense by a half.

Now, depending on the lending institution, at that point, rates could range from 7% to 8% depending on the points, paying additional points to buy the rate down. I chose the 7.5% paying a little more in points.

The loans were conventional loan, with LTV, DTI requirements. Because one of the mortgages involve my MIL, while it's fair to count the mortgages where we have joint properties, they also included mortgages she had with her son, the doctor. My beef with that was they didn't include his income, nor that of his wife in the DTI, just his debt. This made my DTI sky high. The account officer tried to be helpful, though she's not the loan officer, offered to have his income included, and if so, his other debt also. This means his college loans, and I knew he and his wife has over $100K each, and they have RE investments with other doctors. You see it's can of worms. The DTI could be even worst.

When I had my conversation with my private banker at another bank, he recognized the problem and his take is the cookie cutter profiles they try to fit people in is not suitable to real estate investors. It's OK for a simple home, some guy with a nice income, and maybe one rental. It gets more complex beyond that especially if you're enmeshed with other investors, especially those already have a high DTI. Your credit score is on the high end, about the same as mine, so it helps. My private banker said his bank can process the loan based on my income and my wife's our DTI without involving anyone else. Left unsaid is whether they could package and sell the loan that way. The mortgage was in fact sold several months later and I was notified of the transfer and instructions to pay the assigned bank.

At this point, I wasn't going to waste my time shopping for rates. Since rates already dropped over 7.5%, every months delay cost me at least $2,200. In the end, I already paid bank processing fees to the 1st bank, and then again the the second bank. But it's worth it saving $2,200/month.

Some years later, I went off my W2 job, and bought a business. I declared very little income on the business, and my wife was a stay at home mom. This time I had to refi out $200K. I called around loan brokers who hooked me up with a banker doing "no doc" loans, also called at the time "liar loans". The banker interviewed me, spent an hour, and one question I remember was "what would you say your annual income is?". I answered it's about $100K. I didn't bring any W2's, because after all it's "no doc". I got a typed up version of the interview a week later for me to sign and got the loan and it was about 1% higher than conventional loans. Not bad, huh? Unfortunately, due to FANNIE MAE heavy losses with these, they halted these loans for a while, and resumed it in a stricter format. Fortunately I'm mortgage free in recent years and haven't kept up. That's why I recommend you using mortgage brokers who could find a lender for you. They're out there, but with rates at all time lows, even 2% over conventional rates is not bad.

Mike Franco · Answer

Yeah Frank, I understand. I wasn't yelling at anyone here. I'm just trying to find guidance where to look.

When you got your loan approved, did they give you a good interest rate comparable to the lowest rates for conventional loans?

.

If I can't get my investment property refi'd on its rental income alone, I'm gonna have to reach into my pockets to subsidize, and I don't want to do that if I can avoid it.

$1m equity, excellent credit, no income. What loans can I get?

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