Am I stuck now DTI??

Question

Morning all

I have managed to purchase 6 rentals over the last 5 years will 5 of those properties still holding notes. It seems we are up against DTI for our personal income as a measuring stick to purchase another property. We have equity in 4 of the 6 properties  ( really 5 one Mobile Home on 2 acres paid for no one will lend  ). The equity is low on each about 40-50K on  each of the 3. My thought was to refi one of them and use those funds as a downpayment for a townhome (daughter going to university) and rent a room and my daughter live in the other. Problem is I dont think I can get funding now. Is there any way I can move here? Our income w2/1099 is low about 140k a year household so thats the measuring stick. From all properties we are averaging about $375 per door per month. Thoughts??

Alex Bekeza · Answer

@Paul Scammacca As long as the rent can support the new proposed PITI you can get up to 75% LTV cash out at near conventional rates using a DSCR loan.  No DTI, no Tax returns.  Just need gross rents divided by PITI to clear a 1.0 (DSCR).

Jay Hurst · Answer

@Paul Scammacca do NOT just assume you cannot qualify!  Talk to someone who understands how to calculate rental income. If your properties are cash flowing they should HELP your DTI, not lower it. This is a very common misconception and many borrowers just assume they cannot qualify.  That can be a costly mistake.

IF you speak with a LO that understand rental income and you cannot qualify for a conventional loan, THEN and only then, you can pivot to a DSCR loan. But, make sure you speak with a lender with a NMLS number. If they do not, then the only option that they would have is a DSCR loan. So when you are a hammer, everything looks like a nail. A competent LO with a NMLS number can help you with both a conventional or a DSCR loan if needed.

Matt Devincenzo · Answer

I'm going to push back on this...there's nowhere near enough info to say this would help. Putting the home in an LLC changes nothing as it relates to the personal guarantee associated with the debt. Single member LLC with a SFR is almost guaranteed not to be a non-recourse loan, and whether it is included or excluded from the DTI calc is up to whoever is UW the loan.

Since Michael is looking to get an equity loan, we need to find out which property the loan is being tried on. Would he even consider refinancing the rental and putting it into an LLC(not just transferring it to an LLC)? Does that even resolve the equity loan UW issue? Could that refi be a cash out to get the loan he needs? Are the loan proceeds for personal or business use as that changes the calculus on the cash out?

Again I reiterate, if you have a cash flowing rental your DTI should improve not worsen. So either your DTI issue isn't related to the rental, and you probably need to get your financials sorted out. Or your lender/loan product isn't following the conventional guidelines. But just saying get a DSCR loan is short sighted and self serving. @Jay Hurst is the only lender who responded with an attempt at actually answering the big picture question without a simple "go get a DSCR" and no understanding of all the above. If the use of these funds is for personal use, which an equity loan might indicate, then a business purposes DSCR may not even be feasible.

Matthew Crivelli · Answer

Non-QM 30Y fixed DSCR loans. Honestly the rates are completive with what banks are offering, the closings are faster, no tax returns, employment checks, or DTI constraints to worry about. In many cases, a hard credit pull isn't even required. The only downsides are prepayment penalties come into play and closing costs are generally higher. In my opinion, the pros of DSCR loans heavily out way the cons.

Quinton Brown · Answer

Hey Paul, I am LO which of course specializes in investments..You have options of course I agree what others have pointed out... the easiest route is always DSCR which has minimal requirements, the only caveat in the larger downpayment of 15-20%, prepay penalties (maybe)..The 5 loans you have, also look at the current loan structure and  interest rates on your 5 properties, are they below 6? What will a refi do to your current rental income? Take a look at these things first.. But there are options you can pursue maybe an a portfolio refi to use as leverage, (if this makes sense) or just leverage the property without a mortgage.

Stacy Raskin · Answer

If it's determined you can no longer qualify for a conventional loan that's based on your DTI, there are DSCR loans.

More info on how DSCR loans work: DSCR loans won't use your income to underwrite the loan. DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth. DSCR loans generally require a personal guarantor even with the use of an LLC. Most investors use LLCs for tax and/or liability reasons. Here's a bit more in detail about how rates are calculated for DSCR loans:1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs. I've included an example below to help illustrate this.So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.See example below:DSCR < 1Principal + Interest = $1,700Taxes = $350, Insurance = $100, Association Dues = $50Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91Since the DSCR is 0.91, we know the expenses are greater than the income of the property.DSCR >1Principal + Interest = $1,500Taxes = $250, Insurance = $100, Association Dues = $25Total PITIA = $1875 Rent = $2300DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further.

Michael Sockwell · Answer

@Jaycee Greene

I own 1 rental and it’s my personal name. + my current home

Running into DTI issue with an equity loan

Would putting this into an LLC help at all?

Nate Herndon · Answer

Hi @Paul Scammacca - a DSCR loan will not take your personal debt-to-income ratio into consideration. DSCR loans are based on a Debt Service Coverage Ratio, which is calculated as the property rental income (appraised market rents on a purchase) divided by the property debt (monthly principal, interest, tax, insurance). As long as the 'ratio' is a 1.00 or greater, aka breaking even or positively cash-flowing, you can get that loan.These are 30-year fixed loans for investment properties and do not require your personal income, taxes, or debts be taken into consideration.Here's a good BP article explaining how you can use these:

https://www.biggerpockets.com/blog/questions-and-answers-abo...

Josh C. · Answer

@Paul Scammacca

Man when did $140k a year become low income? But as others said your income with the rentals should go up and DTI improve not go down

Am I stuck now DTI??

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