Having trouble refinancing using the BRRRR because of DTI

[Vince Gethings]

Hi BP folks, 

I am looking for some creative ideas to refinance an SFR I just BRR'd.

Here is the back story. 

I have a fourplex and a duplex that I bought last fall (2016) both are fully occupied. I wanted to try the BRRRR strategy, So I bought an SFR in my LLC, rehabbed it, and will be renting it out in the next couple weeks. I went to seek financing and all of the banks and CU's I spoke to won't refinance it because my DTI is too high, due to the loans on the fourplex and duplex. I showed them my rent roll and leases and they wouldn't accept that income because I haven't had them long enough to file taxes on them.

I could quick claim the house into my name to seek conventional financing, however, I would rather keep it in the LLC, and the ARV of this house low ($53,000), which will make conventional financing tougher.  

Any idea's to refinance this house to pull my construction costs out? 

Here are the numbers:

Purchase price: 22,000

Rehab costs: 18,000

ARV: 53,000

I would like to score 80% LTV financing or 42,000

Thanks for your time, have a great night!

Vince G

[Andrew Postell]

@Jill Haselman @Vince Gethings @Stanley Parsley @Andrew Glenn I'm tagging everyone in this post because this is such an important topic. It's important to understand how to structure these transactions properly so you can keep the ball rolling. The theory here is that you should ALWAYS be able to afford an investment property. Since you only buy properties that cash flow, the rent covers the mortgage payment, and it's a wash (or better) on your DTI. In many cases your DTI will be BETTER after buying an investment property. However, how you structure this and the bank you work with is critical to this strategy.

Conventional loans are loans governed by Fannie Mae and Freddie Mac.  Those loans allow you to not only use immediate rental income (with no experience or history) but they also allow forecasted rental income on a property you buy.  You can literally buy a rental property that is empty and have the rental income counted towards you qualifying for the mortgage.  Refinancing a property can also be without a renter but you must have an executed lease to count that income.

So why is the originator of this post having issues?  The main reason is because the loans types that are being used in this post are commercial or portfolio loans.  These loans fall outside of the conventional guidelines and are actually governed by the banks themselves. So we are held to their qualifying standards - which unfortunately don't allow rental income.  And while these loans may sound similar in nature each bank will decide it's terms differently.  Each and every bank will govern it's portfolio loans slightly different.  With over 15,000 banks in America, it is possible to find portfolio loans that will qualify easier but it will take a lot of phone calls.

What is our solution? The solution is to find a conventional lender with no, or very limited overlays on their conventional lending. This might sound even more confusing but a bank can actually add extra rules on TOP OF Fannie/Freddie guidelines. If you have heard "we need 2 years of tax returns" or "Credit score needs to be 680" or "We need you to be on title for 12 months" those are all overlays. You can actually get a loan on 1 year of tax returns, go below 660 credit, and be on title for one day. The most common overlay that large banks have is only allowing 4 or 6 loans. But we know you can do 10. So find a bank with limited overlays and you won't have a DTI issue on your investment properties.