75% Debt To Income Barrier
I have several properties and several mortgages. I have one open unit of the possible 13 (that one is open because I had to remodle it). Here is the problem, I am being told my lender that my to debt to income is too high. They can only count 75% of my rental income. At 75% I have a negative $17.95 per month ratio after all taxes, mortgages and expenses are paid.
What have others done to get past this type of barrier? I could sell off some of my properties. I could sit back and not purchase and or change anything for a few months. I could change my investment strategy and get owner financing or L/O properties. I could try the tax liens or 'subject to's. However, I feel the most comfort with the process that has gotten me where I am. I just need a route around this debt to income issue. What are your thoughts?
I'm not sure what you can do to help the problem right now, but in future purchases, this 75% allowance should be taken into consideration when purchasing. Example: If your monthly rental goal is $1000/month, I wouldn't buy anything that had a monthly cost to you over $750/month (that includes mortgage, insurance, taxes, and repairs).
Have you looked at your terms for your current mortgages? Would it help to refinance some/all into better leveraged loans?
I know a few landlords that have refinanced properties into "package deals" with the bank (2 or more properties but only 1 loan).
Finally, have you checked around for better deals concerning loans? We frequently get comfortable dealing with a bank and forget to check to make sure we're getting the best deal for the money.
Roger
Roger is absolutely right. To add his comment, what about your comsumer debts. Those monthly payments are used to calculate debt to income ratio too. If you are married, you maybe able to shift some of the debts to your spouse (ie balance transfer your credit card debts, refinace your car note with your spouse's name alone) What about student loan? If you have it, you can consolidate it to have a lower monthly payment.
Or, if you have a decent credit score, you could get a stated income loan. Those loans, do not care about your income - they are mostly based on credit and assets.
Good luck and happy investing!
The 75% is of Fair Market Rent. Is there anyway that you may be leasing below market?
I can tell you that Appraisers are very weak when it comes to getting rent ****Must Reach Senior Investor status before posting URL's***s very time consuming and there's not a large enough population of rent comps in the MLS system.
I'd dig them out myself and give them to the appraiser. Just remember that it's a apples to apples comparitive approach.
If you don't have the skills than perhaps a management company in the area (for a few bucks) would furnish the comps.
If that doesn't work than it may be an opportunity to upgrade your portfolio by sell a property.
Thanks All for ideas on this matter. I only have 6.8k total credit card debt outstanding. I have no auto payments. There have got to be something that is not being credited back as income. I do like the idea of the stated income loan. My cards are in my name only. Maybe I can shift some of the debt to my wife's name. I will give these two things a go and let you all know how it comes out. Thanks
Vern,
I believe that you can switch the debt to your wife but somewhere down the road you are going to run right back into the same problem. I would think about possibly cashing out on a few properties and maybe look at a different route like rehabing. By the looks of things you have a good passive income with the properties you have why not expand your horizons. Just a thought I am by no means an expert.
Good luck to you Vern I hope the best for you.
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On 2003-10-13 09:29, Vern wrote:
Thanks All for ideas on this matter. I only have 6.8k total credit card debt outstanding. IT maybe the amout of credit card debt outstanding vs avable credit nahurricane
Quote:The 75% is of Fair Market Rent. Is there anyway that you may be leasing below market?sammyvegas,
Vern's problem is that the lender is only giving him credit for 75% of his current rental income on his current properties. No Fair Market Rent here -- just actual rents as proven by the current leases.
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Vern,
This is another reason why I am a strong proponent of purchasing rental property only when the Debt Coverage Ratio is 1.25 or better. If all your rental property acquisitions have a DCR of 1.25 or better, then, with normal inflationary increases in rents, the lender's 75% income allowance does not pose a problem when looking for new financing.
You might try to work with the lender, too. Instead of using the 75% rental income rules, ask if they will use your tax returns instead. If you show two years of strong positive cash flow on your Schedule Es (before depreciation), the lender may be more encouraged to give you the financing you seek.
Quote: IT maybe the amout of credit card debt outstanding vs avable credit
nahurricane,
The amount of credit card debt vs available credit is already taken into consideration by the credit scores.
The lender uses the amount of money required to service the credit card debt vs the available income to compute the debt ratios. If Vern has $7K in credit card debt with a minimum monthly payment of only $200 per month, then only $200 is charged as a liability against his monthly income to calculate the ratios.
Let's walk through an example. Let's say that Vern has $8K in monthly gross rental income. The mortgage loan payments (PITI) on his rental properties total $3500 per month. The minimum monthly credit card payment is $200. And finally, his monthly mortgage loan payment on his primary residence is $1000. Vern has no other income that is being considered by his lender.
Adding all the debt services (liabilities), Vern pays $4700 monthly, giving him with $3300 net each month from his rental property income.
Because the lender will only allow 75% of his rental income, the lender sees that Vern only has $1300 net each month. With this calculation, Vern's current debt to income ratio is over 78%.
I know of programs that will give you credit for 95% fo the rental income, and still do you rloan as a full doc. If most of your income is from rental income, they will only look at leases, W-2, Fixed income, ect., but not your tax returns. I just closed one for a customer last week.
As already indicated above, you could also go Sated Income.
If you have good credit, you should still be able to get a decent interest rate on these types of loans.
Thanks All,
My credit score is 734 Beacon 96, 660 Empirica, 687 Fair Isaac. I only invest part time, 66% of monthly income is from my 12 years public service job. I have three credit cards that I use, two for business and one for personal use. I have seven mortgages with and one HELOC. I have no slow pay or no pays on my credit report. I have only been investing of 18 months, this may be part of the problem.
Have one rehab that I just completed and one more in process (should be completed before Christmas. It may also be the fact that I have no income from the rehab until it is completed. I am not really concerned about purchasing anything at this point. I have one prop that has a high interest rate, I did want to refi that one. All the rest are at good rates. I could just relax and not attempt to purchase anything until I file my 2003 taxes, this will show better to some mortgage companies I guess.
I got off to a hot start, therefore I guess I had to hit a barrier somewhere along the road. I showed my last open unit today, the possible tenant is on section 8. She liked it a lot and it should rent as soon as the inspector give it the all clear. I don't need to be greedy, time will get me over the next hump, I have faith in that. I have added several hundred thousand dollars to my net asset in the last 18mos. As you can tell, I am looking on the bright side this, so called barrier.