Why can't I get an FHA?

Question

Hello BP Friends!

Currently, my goal is to house-hack a 4 unit building in Kansas City and move there. I currently live in Denver. I am struggling to get loans right now so I think I need to restructure the way my business is setup because I know the income is there. I am trying to get an FHA because I only have about $50,000 in liquid capital available currently. I'll try to keep this as concise as possible. Please let me know if I left anything out.

Personal Financial Info:

W2 Income in 2019 was about $140,000. My credit score is 775. I currently own 17 rental units. 1 Single Family, 4 Duplexes, 2 Quadplexes. Most of these are owned in an LLC with a business partner. My personal living expenses are about $1,500 per month including rent and I have no loans outside of my income producing mortgages.

The single family property is owned solely by me.

Debt: $67,000

Payment: $627/mo

Rent: $1050/mo

Three duplexes were purchased with my business partner, so the mortgages are jointly in our personal names. However, these property's income and expenses run through our LLC. I think this is where the banks are tripping up. For example, one bank said they couldn't count the business income towards my debt-to-income.

Total Debt for these 3: $259,800

Total Payment for these: ~$2,200

Total Rent (still have 2 to reno/raise): $4,633

The remainder of the units are owned in the LLC and the loans are through the LLC via credit union portfolio loans.

Total of 17 units with revenue of $14,200 per month. Debt service is about $6,400 per month.

Why am I struggling to get loans? My financials are pretty good, but might not look good to a lender because of the duplexes explained above? Do I need to only work with credit unions at this point? Do I need to refinance those 3 duplexes into the LLC?

Thanks in advance for the advice!

Kim Tucker · Answer

thanks for correcting me Mike

Stephanie P. · Answer

@Rick Novotny

No underwriter is going to believe you plan to live in one of the units for a variety of reasons; most of all:

• Most people don't go from a single family residential to living in an apartment

FHA's stated purpose is not to be used to for investment vehicles. “FHA will not insure a Mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining Investment Properties, even if the Property to be insured will be the only one owned using FHA mortgage insurance.”

The only way to even be considered for this product would be to prove you have a job in Kansas City and are moving.

You could also use a Fannie Mae type loan, but you can't have more than 10 financed properties as an individual.

Hope that helps explain it.

Stephanie

https://www.fhanewsblog.com/2017/09/fha-loan-rules-investment-properties/

Kim Tucker · Answer

So here I think might be the disconnect

A FHA loan is a first time home buyer loan that is based only on your personal income. So to qualify for this the lender is going to look at your income. So if you are part owner of an LLC, then the income from that LLC that flows to your personal statement is what they will count and they will probably want to see a couple years of tax returns to support that. Or you need to have the income and the down payment personally in some other way, like a W2 job.

An FHA loan is an owner-occupied loan that you can obtain on a 1 to 4 family unit if you live in at least one unit.

Commercial and Portfolio Lenders are great and will lend to your LLC and count your LLC income, but you can't get an FHA loan from them with the low 3.5% down payment.

But if you have the down payment, the commercial and portfolio lenders can get you better terms possibly as you would be putting down a minimum so you would not have the mortgage insurance that comes with FHA.

Calvin Ozanick · Answer

I think you should begin working with some commercial lenders who would be able to help you put everything under one roof. This would limit the areas where banks are able to trip up on. Another potential option would be to salary yourself as opposed to creating rent income. By making yourself a W2 of the holding company, you can report a salary for banks to use as true income.

Alex Olson · Answer

@Rick Novotny I think your financials are fine. Are you talking to any portfolio lenders? I would recommend Cornerstone Bank in overland park KS. Tell him Alex Olson sent you. They are hungry for investment real estate.

Why can't I get an FHA?

Why can't I get an FHA?

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