BRRRR Second Property - not getting financing

[Brooke Spaulding]

Hello, I've been around Bigger Pockets for quite awhile and taking in a lot of the content via podcasts and read some of the books including BRRRR.

Currently my husband and I are renting an apartment outside Boston (too expensive a market for us). We currently own a small home we are using as a vacation rental in Vermont. This is working really well for us and we've had it rented after rehabbing it almost a year. We were ready to move onto house #2 we would look to rehab ourselves again. We are getting our house appraised for a cash out refinance where we expect to get about $30,000 which is plenty for the next down-payment. All this was fine and we have a preapproval letter for more than we want to borrow. So we got house #2 under contract and now our lender isn't able to make it work. I've reached out to another lender to try different loan types. From all my research and working the numbers figuring debt to income and everything it all works. But the income from our VR apparently can't be counted for a least one whole year on taxes or up to 2 years proving stable income. Also one of the lenders also said we have to have 6 months reserves in the bank for the rental on top of whats required for the new property. This was after this lender approving us and seeing all of our financials. 

We have a strong plan for how we are trying to move forward with achieving financial freedom but if this is true I'm wondering how others make the BRRRR strategy work or ever move onto house #2 if they can't afford to house hack a primary? Is there any other way? Thought I understand all of this and had our ducks in a row but this is throwing me for a huge curveball.

Thanks!

[Andrew Postell]

@Brooke Spaulding thanks so much for posting this and I am VERY sorry that this has occurred.  Based on what you have described you 100% need a different lender.  I can't tell what loan type you are applying for but if it's for a Fannie Mae and Freddie Mac style loan....they do not have those rules on rental income.  But both Fannie/Freddie do allow lenders to add extra rules OVER the Fannie/Freddie guidelines.  In the lending world we call these "OVERLAYS".  Now, it is likely that the people you spoke with at those lenders have no idea that their rules are overlays or what those even are. Overlays come from senior management and are usually not communicated to the front lines....because if you knew that you could go somewhere else to get a loan that means they might miss out on business.   And this is why Bigger Pockets is such a great site - you get to learn about a lot of things here - even the "hidden" things.

Now, it is also possible that maybe they also didn't know the rules very well...or got them confused so here's the ACTUAL rules to Fannie/Freddie and how they use rental income to help you qualify:

• To use rental income on a subject property (meaning, the property you are getting the loan on) then an executed 12 month lease is all that is needed.  So if you have rented the property for nearly a year...that is fine!  Well, as long as you have a 12 month lease.
• However, if you have been renting that property with "short term" leases (aka AirBNB) then you WOULD need the income to be on 1 year of tax returns in order to use it.

Now, there are some nuances to those rules...but the point here is that we need to get you with a lender with NO overlays...or at least very few.  Which is normally from a smaller, local lender.

Now, let's assume for a minute you HAVE only been AirBNB'ing your property and you wont' qualify for a while longer - there are STILL other loan types that you can get on this property!

Generally speaking there are 2 main loan types for investors:  "Conventional" and "Portfolio"

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different.

Fannie/Freddie types of loans will be available everywhere and those rules might change SLIGHTLY between lenders. Portfolio loans can run the gambit. Since each lender controls it’s own money you will have to call around to ALL the banks to learn about all the programs. A mortgage broker will help with this some…but even the best mortgage brokers don’t have access to ALL portfolio loans out there.

I know this is a lot of information...and honestly I'm just giving you concepts here.  There are more details to it than this.  But if you can understand the CONCEPT, then you can find a lender on your own.  Here's what I would suggest on that front:

1. Post in the Bigger Pockets STATE forum that you are looking in. There are usually some good, local investors that monitor those forums. Maybe they already have a suggestion or recommendation for you? Certainly try there.
2. Visit your local REI groups. There are many groups that meet across the country. Some post here on Bigger Pockets. Many post on meetup.com. Networking is always a great practice and you never know who you might meet there and what good information they have to share. Would certainly recommend visiting if one is close to you.
3. Calling - and then there's this option.  The other 2 will give you more success than this route.

Once you have a good recommendation, then what?  How about a list of questions to actually ASK your lender to know if they have OVERLAYS or not?

Questions for Lenders

1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
2. When do you start using “After Repair Value” on my property?
3. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
4. What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
5. How many loans can I have with you?
6. Can I change title to my LLC?
7. Do you sell your mortgages?
8. What is your loan minimum?
9. Can you explain to me what your reserve requirements are? (hint: Fannie is 6 months....Freddie is less. Make sure your lender has access to BOTH if you qualify that way...otherwise, portfolio loan is your option)

*WHEW*  I know that was a lot but I do hope it helps in some way.  Feel free to ask anything additional if you need.  Thanks!