How to qualify for a new mortgage when keeping my house as new mid-term rental

Question

Hope to find some help from the Bigger Pockets community!

I have some questions about qualifying for another mortgage when I have outstanding mortgages on investment properties.

So here's the scenario:

I am purchasing a Quadplex on 6/28/2024 and it's new construction.  It will take a couple months to fill it with tenants.  The mortgage will be for

approximately 900k at 4.25% and in my name. I have an LLC that I just created that I plan to move that property into.

I am currently living in a 3/2 valued at $600k with an outstanding mortgage of $300k. I would like to retain this house and turn it into a

mid-term or long-term furnished rental.I would like to move out of that house and into a bigger primary residence which would likely be a $750-850k purchase price.  I can bring 200-300k in down payment to that closing.  I would like to have a mortgage payment in the $3500-$5000 range.I am just getting started in real estate investment properties and don't know enough about how other landlords show that the other mortgages are covered by rents and qualify for additional loans?

I suspect that until I get both investment properties fully leased that my debt to income ratio will be too high.  If I can show the signed leases, is that enough evidence for a lender?

I have found a property that I like for my new primary residence and I am trying to see if the seller is open to a longer duration close where I rent from the seller for 90-120 days to allow enough time for the investment properties to get leased.

I am also considering asking if they would be willing to explore a seller-financed option but I don't know how to structure that so that a regular seller might find that more attractive than a regular closing.  I would be interested in talking to anyone that has structured some owner financed deals to understand how to approach that with the seller.

thanks,Clint

Josh Bowser · Answer

Clint, I'd make sure you understand the implications of quit claim deed at closing with a loan in place under a different name. Could trigger the loan to be called and you'd have to refi with a DSCR at a much higher rate. Getting a new build 4 unit at 4.5% now is insane!!!

When it comes to obtaining a primary - I'd have a conversation with a mortgage broker that is TRULY investor focused when it comes to originating conventional loans. There are some circumstances that will allow them to account for long or mid term rental rates when it comes to your pre-approval amount if your debt to income ratio is a concern. They will likely need to see a signed lease reflecting that rental rate before your first mortgage payment is due before you can get your loan approved.

Lease purchase agreement should work in your case - however, it's all about the willingness of the seller to your point. If you're serious & confident you can lease your properties up in time, you may want to consider putting significant rent money and EMD up front.

Feel free to shoot me a pm or give me a buzz at contact info in bio - always down for a chat!

Andrew Postell · Answer

@Clint Wenk this is not an issue at all.  You can use rent to offset that debt right away.  Mid-Term rents do cause a little complication...but that's what DSCR loans are for.   Again, not a big issue but important to understand certainly.  Also, it is 100% NOT a requirement to have 2 months of receipts on rents to qualify for Fannie Mae.  Now, your lender may have that rule...but Fannie/Freddie certainly don't.  As always, you can work with who you want...but there are lenders who don't need that.

I wrote a post on how to find investor friendly lenders that you can read HERE.  It includes the questions (and answers) you should be speaking with any potential lenders about.

Hope that helps in some way.

Clint Wenk · Answer

Thanks for all of these thoughts, Dan!

I spoke with my lender and they need to see signed leases and receipts from 2 months payment before they would include rent as income.  Says this is according to Fannie Mae requirements.

I explored seller financing but she wanted prime +1% and full asking price and was not able to convey existing furniture to me... so it was less attractive to me.

We'll see if it sits on the market, and comes down in price and I can then make another offer.

Thanks again!

Dan Thomas · Answer

A couple of thoughts:

1. Speak to your lender.  Explain your situation.  If you have a hungry lender who wants to get deals done they will identify the gaps and give you options to overcome the hurdles.  New rentals can be challenging when it comes to debt to income.  In my experience lenders much prefer to see the income on your tax returns then from what is on a lease.

2. Seller financing....make it worth their while.  It seems like you have a reasonable down payment available so offer them a reasonable interest rate.  No one is going to sign up for a 3% seller financed note in this enviornment.  If it is that important to you to get into this house now offer them an above average rate with a strong down payment with a SHORT TERM.  18-24 months maybe?

Seller financing isn't all it is cracked up to be from the sellers standpoint so you need to give them a reason to want to do it.  Reasons to want to do it:

1. Asking or above asking purchase price

2. Short term

3. Competitive rate

4. High down payment

Good luck, it seems like you have alot going on!!!