Financial folks, I'm stumped. What's my best first loan option?

Question

Hey there! Sorry for the long post. The urgency will be clear by the end, I promise. I'm ready to buy (or so I thought) my first investment property.

I've got great personal credit, about $70k in liquid assets that I'm willing to invest. I've also got probably another $70k in equity on my primary residence. I'd prefer to conserve as much cash as possible for additional properties/projects.

My problem I'm finding is that I can't qualify for much with conventional loans, because my W2 income is really low. I make good money, but I'm in a tipped position. I work at a ridiculously expensive hotel where I make a seemingly silly amount of money for doing a relatively easy task. I know stated income loans disappeared years ago. Can I do a DSCR loan if I have no rental history?

I'd consider turning my current home into a turnkey LTR rental, and living in the property I'm buying. If I could leverage that somehow? My current mortgage broker says I can't qualify for anything, including FHA, because my DTI is too high?

I'd love to put down 10%, and be able to repeat it as many times as possible before I run out of investible cash.

Any ideas, or am I stuck putting a super restricting amount down on my first property?

Additionally, this is the urgent part I was talking about earlier. I could be, within days, moving into a different role at the hotel. That would essentially double my paychecks. But I'd never get another tip. I may be offered this job tomorrow. I'll take it, if a bigger paycheck is my only option to qualify. But in reality, I'd actually be losing money when my cash is considered. Do I need to take this job tomorrow? I don't really want it, but if it's a necessary step....

Jeff Copeland · Answer

If you want to stay in the tipped position, and you earn more money there anyway, why not just report your tips accurately so they show up on your pay stubs as taxable income?

This is a similar challenge to what many self-employed individuals face: You want to minimize your income for tax purposes, but you need the income to qualify for debt. You can't have your cake and eat it too.

Dan Host · Answer

@Jeremy H. Thanks for the bits of advice, peppered with several unnecessary jabs. I really thought this place was a bit more evolved, but....alas.

Sergey A. Petrov · Answer

If your tips are properly reported, they show up on your tax returns and help you qualify for the loan. If they are not reported, that is called tax evasion and people go to prison for that. As a side note, you are posting on a public forum for the whole world to see.

Cindy Tansin · Answer

You need to work with a lender who has options - ie a mortgage broker.  Since you're buying investment property, you will be able to include income from the property in your debt calculation.  If you don't have enough income to get a conventional loan, there are many different Non-QM (creative) loans that could potentially work for you.  Best to let the professional (who has options) have a look at your specific scenario and paperwork and tell you what you can do.

Sergey A. Petrov · Answer

Lenders and CPAs have competing interests. Your CPA is looking for tax compliance while maximizing available deductions and minimizing your tax bill (within the tax code provisions). Your lender is looking to maximize your income to qualify you / sell you a loan. Pick one you prefer. Better yet have your CPA and your lender work together which, sometimes is a battle of its own

Bryan Schmidt · Answer

You can always amend your returns and pay any additional taxes as/or penalties - the government will always take your money!

I’m not a huge fan of amending but when done properly you won’t have to wait two years for your income to catch up to your investing goals.

The key is working with the mortgage provider BEFORE filing any of your returns, amended or otherwise.

My team and I review the tax returns and run the income calcs before you file the amended return to make sure that you are not overpaying on income taxes and more importantly, we make sure that you are not filing an amended return with too little income.FYI - most accountants will fight with you and tell you that their preparation will save you money on taxes and allow you to still be approved for a mortgage, but 99% of the time that is false.

I prove them wrong on a very regular basis.

So, to summarize, you need a progressive mortgage provider and a progressive accountant to make this work now and in the future for you.  If my service providers are not real estate investors I don’t work with them.

I hope that helps!

- Bryan

Dan Host · Answer

@Sergey A. Petrov Thank you!! That's a great idea too!! I'm going to make this happen!

Dan Host · Answer

@Jay Hurst Thank you Jay, that was very helpful. I really appreciate you being so through.

Sergey A. Petrov · Answer

@Dan Host - something just popped into my head! Talk to a CPA first. But, as it stands, you have unreported/ underreported income. You could amend and re-file up to, I believe, three years worth of tax returns. When done voluntarily, I think, IRS even waives some penalties that would apply should they discover the discrepancies on their own. Check with the lender as well to see if they’ll accept amended returns. I see no reason why they wouldn’t but who knows. And you’ll be killing two birds with one stone - complying with the tax code and qualifying for financing

Dan Host · Answer

@Jeff Copeland Oh! I didn't realize it was even in the realm of possibility. Thanks Jeff!

Financial folks, I'm stumped. What's my best first loan option?

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