CASH OUT REFI, DEBT TO INCOME TOO HIGH, DO I NEED AN LLC?

Question

I need advice badly. My husband passed away so my W2 income is now half what it was.  I have 2 single family rentals and a duplex.  Plus my personal home. We never started an LLC. I spoke to Wells fargo about cash out refi on one property to continue investing but he says my debt to income ratio is way too high. A friend said that if I move the properties to a LLC then the monthly payments don't show on my personal credit report therefore reducing the debt to income ratio.  any suggestions or comments ?

Andrew Postell · Answer

@Lori Bray you have some good responses above but I think it might be a "language barrier" type of thing.  Sometimes we speak in terms that an "average" investor should know...but a beginner may not.  So if you don't mind, let me give you some context so you know how to speak with lenders.  And the short answer here is that you can 100% get a cash out loan.  You will be able to find what you need.  Here's the scoop:

Generally speaking there are 2 main types of loans for investors:  “Conventional” and “Portfolio”

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names).  These loans are all 30 year fixed rate loans.  They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending.  Fannie/Freddie money = Fannie/Freddie rules.  NOT the bank's own money.  Since these loans come from the Federal Government, they want to see your Federal Taxable income.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money.  Sometimes referred to as "commercial" loans. Sometimes they are called "Bank Statement" loans, or "DSCR" loans, or "community" loans.  Whatever the lender wants to call it I want you to understand this is NOT government money.  It's the bank's OWN money.  These loans are a lot more flexible than "conventional" loans.  Bank's money = Bank's rules.  If they like you, then maybe they will lend to you.  The drawback here is that the rate will be higher, or the loan will have a prepayment penalty, or some other feature that may not look as good as the government loan.  And that's ok.  There are PLENTY of investors that never touch the conventional loan world and are VERY successful.

So we just need to get you in front of a lender that offers the "portfolio" style of mortgage.  And here's a hint - ABSOLUTELY NO LARGE, NATIONAL, PUBLICALLY TRADED BANKS.  They are out for us.  You need to go local.  The smaller the better.  Here's an entire post I wrote on How to Find Real Estate friendly lenders HERE.

*WHEW*  I know that's a lot of information but hopefully this will help you in identifying a good lender and what type of loan you should be targeting.  Feel free to ask anything else if you need.  Thanks!

Bill B. · Answer

You don’t need nor will an LLC help. Refinancing at a higher interest rate won’t help either.

Honestly it sounds like your personal expenses are too high if the rentals are carrying themselves.

It might be a good time to sell your primary home since that would be tax free, and move in to one of the rentals. I bet you would find your life way less stressful and give you a chance to catch your breath.

Andrew Postell · Answer

@Lori Bray the benefit of portfolio loans is that they don't care about our personal "debt to income" ratio.  They qualify the loan based on the income of the property.  Essentially if you earn $2000 per month of income, your mortgage (with taxes and insurance) cannot exceed $1999.  So they will require the property to cash flow.

The mortgage does not go on your personal credit with a portfolio loan but it is likely that it will contain a clause that says something like "If you default on the loan we will place the negative payment history on your personal credit"....so just make sure to pay on time and everything will be ok.  You can certainly do what you are trying to accomplish and not have the mortgage report to your credit.

Hope all of that makes sense.

Erik Estrada · Answer

It won't be as accurate as a full blown appraisal, but it will give a lender an idea of what your home is worth.

Erik Estrada · Answer

You can look into getting a Broker's Price of Opinion or getting a local realtor of yours to do a CMA, and paying for the help.

Sylvia H. · Answer

Hi just thought I'd jump in for a minute to talk about credit report. If the properties were in the name of an individual they will stay that way until you refinance them. Therefore regardless of you forming an LLC and transferring the property to the LLC they will remain on your credit report. If you transfer the property to an LLC and the lender finds out they can call the mortgage due and payable because you effectively transferred ownership to another entity.

Best of luck

Erik Estrada · Answer

If this is an investment property, you can do a DSCR cash-out refinance. They do not consider DTI. You are qualified based on the cashflow from the property, credit score, and some rental property experience.

Eliott Elias · Answer

Get in touch with a lender that does DSCR loans. Not sure if you have to put the property in your LLC but they don’t consider debt to income

David M. · Answer

@Lori Bray

Just remember for rentals the profit/loss is recalc'ed on 75% of the rental income (not the profit).  So, if they are just covering themselves, then for loan calcs they are short 25%...

Maybe your issue is just paying off that credit card...  With a cash out refi, if you tell them they can send the money to pay off the credit card that might get you to qualify.  I am assuming its okay that part or all of the cash out takes care of your credit card debt.

David M. · Answer

@Lori Bray

The monthly payments will still show up since the mortgage will still be in your name, unless you refi those via the LLC -- obviously another issue.  Meanwhile, moving Title around might be an issue with the LLC's corporate veil...

The deposit banks aren't the ones to be getting loans from nowadays, however.  I'd like to think that your rentals are holding their own, after using 75% of the rental income (not profit).  So, it is your personal property that is too high?  Also, rates are much higher than before...  hmmm..

Oh, LLC's don't provide any tax benefit unless you are investing with a non-spousal partner...

CASH OUT REFI, DEBT TO INCOME TOO HIGH, DO I NEED AN LLC?

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