How do get more properties with a maxed out DTI?

Question

Hello Everyone,

My wife and I both work and we own 3 properties. We show rental income on our taxes, so we are a 3 income family.  We are debt free except for our mortgages.  Yet our biggest issue to get a new conventional loan is our Debt  To Income ratio.

If someone’s DTI is maxed out, what are the options?

Owner Carry Loan or Private Money Loan. I hear that they still show up on your credit report, therefore adding more debt to the ratio.  If this is the case I would not be able to refinance my existing loans if rates went lower again.

Additionally I hear that private money loans can be 7 to 10%.  I live in the Denver area and this would through my numbers off just on the hope to “cash flow”

Lease purchase, during the renting period this does not affect your DTI. But to roll this into a permanent loan, this does again go on you credit.

I am stuck. I am new to these creative ways to finance.

Daniel Molina · Answer

@David Meier you should look into specialized lenders that offer portfolio/blanket/umbrella loans. These are common names used for loans that will encumber more than one property under a single loan. It would be recommended that you transfer all properties into an entity but this will allow you to refi all 6 properties under a commercial loan which will not show up on your DTI. Almost all of these specialized lenders will not report to credit since the loan is business purpose.

These loans will be underwritten and treated as a commercial loan so the NOI of all 6 properties must cover the new monthly payment and expenses. This will be called a DSCR (debt service coverage ratio). There are plenty of posts and blogs on BP about these portfolio loans, and many lenders on here can offer you some options if you search the market place.

Lastly, if you do not want to cross collateralize all 6 properties there are some lenders who will offer single asset rental loans that will be treated as business purpose as well. Personally, I would look for national or larger lenders since the experience and diversity of lending options will usually be in your benefit instead of shopping local lenders to Denver metro area who may not have the same level of experience purely based on the limited market they service.

Hope this helps and happy to address any other questions.

Ben Stoodley · Answer

@David Meier the private lending industry created 30 year rental loan options a few years back. As their demand has skyrocketed, the options have increased and the rates have decreased. These loans are mainly referred to as DSCR loans, as previously mentioned. The qualifications are based on the subject property’s income and expenses only, not the borrowers. Most lenders require only a credit check and bank statements to qualify. Furthermore, I have seen much lower rates being offered out there then previously mentioned. I have seen rates as low as 3.875% for a 30 year fixed on these DSCR products. They typically max at 75% LTV for refis and 80% of purchase. Rates typically depend on LTV and credit score. Since it’s the private industry, most lenders will require an LLC as borrower, so it shouldn’t show up on your personal credit, however you do have to personally guarantee them. Let me know if you have any other questions!

David Meier · Answer

@Daniel Molina this is an eye opening key to this puzzle.  I appreciate your detail on my question.  In short a commercial loan is something I will look into.

Do you know if investors roll there personal home onto these types of portfolio loans?

Patrick Prunty · Answer

@David Meier, not all private lenders pull and/or report to credit...that said, if you take a private loan I suspect you'd like to write off the interest on your tax return so the conventional lenders will pick up the debt when they review your returns... Private money is becoming increasingly more available and thus with more supply rates are being driven down as those private lenders compete.  I'm seeing private rates on a 30 year amortization at under 6%.  Generally you'll need more down with a private lender who is vetting the property and your equity position compared to the conventional lender who cares mostly about credit and DTI.

Daniel Molina · Answer

Typically these are only for rental/non-owner occupied homes.

Matt Devincenzo · Answer

A couple comments on all the above suggestions, as you've gotten quite a few good ideas to move forward with:

1) Whether your new lender reports to credit bureaus or not is irrelevant. If you do not report the loan on any future application it would be fraud to not disclose the debt. I only say this because often there is an unstated presumption that by it not being reported your problem is solved, which is only true if you plan not to tell a future lender about the loan...which they will ask about...

2) If you have cash flowing rentals then your DTI should be going down not up. Look back on BP for a recent discussion of how DTI for conventional should be calculated. Your lender may have overlays, but the way the guidelines outline the calculation will increase your net income not decrease it.

3) Why would you not declare all expenses like interest? Again not declaring interest expenses to present a better financial picture specifically to qualify for a loan would (IMO) be fraudulent. You're painting a picture of being more financially stable than the bank thinks you are.

Ultimately alt doc type products probably allow you to continue to grow, and paying higher rates for a time isn't the end of the world if you have an exit plan. I'm similarly in a high COLA area, and I'd gladly pay 7% for some assets if I knew that in 12 months I could have rehabbed and refi into 4% debt. But I'm betting you can find a low cost non-conventional product in your area. I just found a small CU that offered 10 year term, 25 year amortization with 4-4.75% rates on commercial loans. That isn't bad if the asset has some value add component that you can realize over a couple years and then refi if needed.

Ben Stoodley · Answer

@David Meier always a good idea to have multiple lenders in your network. Big lenders offer better rates typically but smaller lenders may have better service and flexibility. Message me and I’d be happy to suggest some more.

David Meier · Answer

@James Carlson I wish I had cash. You are correct, most of our debt is related to our primary residence. At this time we do not have enough equity to pull out for a cash purchase, only for the down payment for the next one.

David Meier · Answer

@Ben Stoodley rates sub 4% could solve my problems. Where do you think I should start my search for a product like that. Large commercial lenders, small local banks, all the above?

David Meier · Answer

@Patrick Prunty thank you for your information on private loans. You mentioned writing off the interest. Do you think some investors would not write off the interest in order to keep there properties off there books? I quess the theory would be to be able to get more conventional loans if these other properties did not show on the taxes?  A good question for a commercial lender and my CPA.

How do get more properties with a maxed out DTI?

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