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

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

Dan Host
Brunswick, GA · Member since 2016 · 27 posts · 8 votes

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....

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Jeff CopelandBusiness Member
Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
4y

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.

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  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    4y

    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.

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  • Jeremy Horton
    Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes
    4y

    Wow that was a lot and all over the place - from loan types to your personal job...

    You can do a DSCR loan, no doc loan, HELOC or something like that. Talk to a different lender - commercial/business type loans is what you'll need to look into since your income on paper is low. You may be able to put down a higher percentage to qualify for something more expensive as well.

    You're not going to be able to just go around and put 10% down on a lot of places until you run out of cash. Sounds like an absolute trainwreck waiting to happen anyways. That whole post just sounds like a trainwreck honestly. 

    We don't know about your personal life and your personal job - do what you think is best. 

    0Reply
  • Sergey A. Petrov
    Real Estate Consultant · Seattle, WA · Member since 2022 · 1k+ posts · 784 votes
    4y

    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.

    2Reply
  • Cindy Tansin
    Lender · Los Angeles · Member since 2022 · 8 posts · 7 votes
    4y

    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.  

    1Reply
  • Dan Host
    OP
    Brunswick, GA · Member since 2016 · 27 posts · 8 votes
    4y

    @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.

    3Reply
  • Dan Host
    OP
    Brunswick, GA · Member since 2016 · 27 posts · 8 votes
    4y

    @Sergey A. Petrov I agree, and I'm not dodging any taxes. I'm simply trying to make an informed decision, quickly.

    If I knew two years ago (what I'd need for W2 income to qualify) what I know today, I 100% would've reported every dime. I want to start investing, and I'm attempting to discover the most effective route.

    So please, I'm not here for the lecture. If you have any further advice, I'm all ears.

    0Reply
  • Dan Host
    OP
    Brunswick, GA · Member since 2016 · 27 posts · 8 votes
    4y

    @Jeff Copeland That totally makes sense. If I report my cash income, don't I need two years of proof documentation? So I'd have to wait two years, and hope that no regulations change? Am I understanding this right? Thanks for the info!

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  • Dan Host
    OP
    Brunswick, GA · Member since 2016 · 27 posts · 8 votes
    4y

    @Cindy Tansin Thank you Cindy! I appreciate the reply. Do you have any recommendations for a good broker in Georgia?

    0Reply
  • Sergey A. Petrov
    Real Estate Consultant · Seattle, WA · Member since 2022 · 1k+ posts · 784 votes
    4y
    Quote from @Dan Host:

    @Sergey A. Petrov I agree, and I'm not dodging any taxes. I'm simply trying to make an informed decision, quickly.

    If I knew two years ago (what I'd need for W2 income to qualify) what I know today, I 100% would've reported every dime. I want to start investing, and I'm attempting to discover the most effective route.

    So please, I'm not here for the lecture. If you have any further advice, I'm all ears.

    It seems you’ve answered your own question. Now you know, so you can start your journey and be ready to qualify hopefully after the next tax return. I wouldn’t trade a higher paying job for a lower paying job. Other products are out there but if you are all cash (without depositing every penny in your bank account), they likely won’t help you today. Find a partner with verifiable income or start your planning now and make a move once you are able to qualify. 
    0Reply
  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    4y
    Quote from @Dan Host:

    @Jeff Copeland That totally makes sense. If I report my cash income, don't I need two years of proof documentation? So I'd have to wait two years, and hope that no regulations change? Am I understanding this right? Thanks for the info!


    Not necessarily. Underwriting for W-2 employees is based on documented pay (usually payslips and bank statements). The two year rule is for self-employment. Talk to your lender and see what they say.

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  • Jay HurstBusiness Member
    Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
    4y
    Quote from @Dan Host:

    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....

    The income qualifications are different for owner occupied and non-owner occupied. Its is actually EASIER to qualify for a non-owner occupied loan as those loans are often not covered by what is called a Qualified Mortgage (or QM). ALL owner occupied mortgages are QM which requires the lender to verify your ability to repay (or ATR) per federal law.  The ATR is most often done with W-2's/paystubs, followed by tax returns for self employed but can also be asset depletion, bank statements (for self employed instead of tax returns) etc..  So, the ATR does NOT have to be pay stubs and tax returns, but there has to be someway the borrower demonstrates the ability to repay the mortgage for an owner occupied mortgage. In your case, assuming your broker is correct, because you are a W-2 employee pay stubs/W-2 is your only way and that what you show is not enough.  (70k would not be enough for asset depletion)  

    However, for a non-owner occupied the QM distinction does not apply, so the ATR is NOT required to be calculated. That is why the debt service coverage ratio option exists. As long as the rent for the property covers your all in payment you could potentially qualify for the loan. Again, would have to be non-owner occupied so just rental purposes.  As a first time investor, you would likely have to put down 20% but you could make it happen no matter what your W-2 or tax returns say. 



      
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  • Dan Host
    OP
    Brunswick, GA · Member since 2016 · 27 posts · 8 votes
    4y

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

    0Reply
  • Sergey A. Petrov
    Real Estate Consultant · Seattle, WA · Member since 2022 · 1k+ posts · 784 votes
    4y

    @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 

    0Reply
  • Dan Host
    OP
    Brunswick, GA · Member since 2016 · 27 posts · 8 votes
    4y

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

    0Reply
  • Dan Host
    OP
    Brunswick, GA · Member since 2016 · 27 posts · 8 votes
    4y

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

    0Reply
  • Bryan Schmidt
    Lender · Chicago, IL · Member since 2018 · 8 posts · 6 votes
    4y
    Quote from @Sergey A. Petrov:

    @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 

    I’ve been doing mortgages for 23 years and I work with a lot of accountants and their self-employed borrowers.

    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



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  • Sergey A. Petrov
    Real Estate Consultant · Seattle, WA · Member since 2022 · 1k+ posts · 784 votes
    4y

    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

    0Reply
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