Income does not qualify for a second property

[Renee Z.]

Dear All, 

I know this must be a newbie question: how to qualify for a loan on a second or even 3rd property when your income is not great. A little back story here: 

My husband and I bought our first home, a $130,000 one-bedroom condo back in the beginning of 2016. I was a part-time employee who just finished graduate school with student loan, and my husband was a PRN employee in a hospital supply chain. Our income was really low, credit score was pretty garbage and we had nothing in the bank, so we got an FHA loan, co-signed with my mother-in-law and put 3.5% down with a 3.75% fixed interest rate. My parents-in-law also helped a lot with down payment and closing cost. It was a great little place, the only reason it had been sitting on the market for 4 month before we made an offer is because the pictures were pretty ****** and the agent was not very reachable. So we jumped on it.

Not long after we got that place, we both became full-time, paid off my student loan and we are recently looking for a second property to buy. Ideally we want a place similar to a duplex, such as a place that has a independent basement with kitchen and full bath that we can rent out to help with the mortgage, we would move in there of course and rent out our condo. 

We just found a property around $380,000 that are very close to where we are now, 3 bedrooms+1.5 bath and a basement we can put a little work in and rent out. Problem is that we have been putting extra money into the principal of our condo, aiming to refinance, get rid of the mortgage insurance and get my mother-in-law's name off, since it makes it harder for her to get a loan if they ever need one. So our saving is garbage. Although my father-in-law is willing to lend us money for down payment, and our credit score has sky rocketed, it is still a big stretch because of our income. 

According to our mortgage agent, since we are not first time home buyer, we need to put minimum 5% down with an FHA loan. Even if that's not a problem, our $4,800 monthly income is too low. In order for the rent from our condo to be counted as source of income, our condo has to be at least 100 miles away from this new property, or we would have to rent out that condo for at least $2,500 a month with an executed lease, which is impossible. We pay $1,300 monthly for the condo including condo fee, mortgage, mortgage insurance and taxes, etc. We were hoping to rent it out the same amount and break even.

This is where my question at the beginning comes back, and I might not be the only person wondering about this. We are not going to stop at our second property. Our plan is to rent out our condo, buy a second property, move in, rent part of it out, stay for at least 1 year, save up and move onto our third property the same way. But according to our mortgage agent, the only way to do this is to spend years saving up for a 20% down payment on a conventional loan, or get a promotion with a substantial raise, which could also take years. Is there a creative way around it? 

Thank you all for your time. We would appreciate some of your thoughts on this

Best, 

[Seth Wells]

I have 6 properties, 12 total units and they all have mortgages on all of them; I do not have that much more income than you (about $1000 more). My advice is to find another mortgage broker. With almost all my properties I have been told no at least once and had to find another lender. Don't go to a bank, find a normal mortgage broker, they seem to have less stringent rules. I have never heard about the 100 mile rule and I would argue that it is not a normal thing (my properties are all over the place). I have even had different mortgage brokers calculate my DTI differently. Also, some will use the lease you will get on the condo as income and some won't unless it has been rented for a year, you have to find the right lender. Also, do NOT do another FHA loan. Do a conventional loan at 5%. FHA does not allow you to get out of paying mortgage insurance unless you refinance, but a conventional loan allows you to once it appraises at 75% (meaning you dont have to refinance and get a higher interest rate if it is now an investment property). ALSO, with a conventional loan, you can actually "buy out" PMI for a flat rate price depending on your credit score... this could save you money in the long run and also make your payment less, therefore making it easier to get approved on the new loan. My last piece of advice is to always pay attention to the income the property is going to bring in, in relation to the mortgage payment you will have. Your condo is not a good rental property because it does not cash flow enough and therefore is not only a bad investment for that purpose but it also makes your debt to income ratio to high. It sounds like you are doing the exact same thing again..... meaning that if you find a way to buy this new property, you might not be able to buy another after it. The rent on my properties are double the mortgage payment, which has made it a lot easier on me. If you are serious about being an investor, you need to focus more on that, than where you want to live.