Got an email from LendingHome about their rental program. As always do your own diligence.
Rates as low was 5.375% and pre-payment penalty the first 3 years. Wow. You’d have to put a ton down to not be cash flow negative in the Bay Area. The program could work in other areas. Use it to buy a bunch of homes then refinance them after 3 years.
This program is for single units only, and they charge 2 points, and 3 years prepay penalty. 5/1 ARM.
It’s not a bad program. The key is that this underwriter probably does not look at your personal income or DTI, but will make the loan as long as the rent covers the payment.
There are many lenders with similar programs.
Also check out LoanStream, they also make loans where rent covers debt service. They are very aggressive… e.g. they look at your gross rent and if it covers PITI, then the loan flies. (They don’t account for utility bills that the landlord may pay or repairs/ maintenance.)
I got a 30 year fixed at 5.49% from them recently.
The funny thing is, in the first month they sold the loan to USBank. As a long-term customer of USBank, I had previously tried to refi this property with USBank, and they had turned it down.
Typically, they increase the interest rate or the loan cost (points) if there are issues like “multiple units” or “condo”. My 5.49% was for a PUD in Capitola.
Just curious why would not regular lenders lend on an investment property if the rent can cover the mortgage and the operating expenses.
Because banks don’t usually keep loans on their books and they typically sell them to Fannie or Freddie, which means loans have to follow their guidelines. Big part of the qualifying guideline is borrower’s income profile.
This makes sense. So having a nice borrower profile is a good thing. I am guessing then that for a property that has good DSCR, lending on it has no bad impact on individual borrowers credit score/profile. Bad not in negative sense, but in a way that it can reduce the borrowers credit score.
You need 2 years of rent history for the rent to count as income for DTI calculation. Without that, the rental mortgage kills your DTI ratio.
Is this rule of thumb correct?
If the rental earns money, it is counted as an income for DTI calculation. Rental Income is added to the denominator.
If rental loses money, it is counted as a debt for DTI calculation. Rental Loss is added to the numerator.
DTI = (sum of all debt payments per month)/ (sum of all incomes per month)
To whom the two-year rental history rule apply? To the borrower, or to the property?
BARE hardly has net positive rental income SFHs. May be MFHs and Condos have more.
It applies to the borrower. It’s your total DTI ratio not for the property. If you own a home and want to buy a rental:
DTI = (your mortgage + rental mortgage + other debt) / your income
Once you get 2 years of history:
DTI = (your mortgage + rental mortgage + other debt) / (your income + rental income)
You can’t add your rental income to your income for DTI until 2 years. You might get a waiver if you’re close. I got a waiver at 20 months, but they increased the reserves requirement.
You are perfectly right as I am going through the same issue.
Bank needs clear two years tax filing showing your rental income where as I have appx 22 months completed and filed only one year tax with rental income. They are telling my DTI has issue even though LTV is 50%. Bank needs to waive or reject my application, I told my agent let bank decide whatever they want !
This is true for any rental:
+ Rents collected
- rental OPEX
- rental mortgage (P+I)
= net rental income or loss
Now there could be two way the DTI can be calculated:
DTI = ( home mortgage + rental mortgage + other debts) / ( other income + Rents collected )
DTI = (home mortgage + other debts) / ( other income + rental income or loss )
Method 2 seems to mimic 1040 where rental loss can be used to reduce personal income.
Which one the lenders actually use? Or they use some other method?
Lendors may use anyway they want, but normal practice is use 1040 rental P/L (that means all depreciation is also accounted). They directly take the 1040 from IRS with your approval.
If you have multiple properties, learn combined DTI and Combined LTV, which is tougher to qualify.
Lender wants safety for their money and the requirements are set to protect their money.
You should too. You should keep your personal DTI = monthly repayments/ personal income to be less than 40%, exclude net rental income, RSUs and cash bonuses, include dividends. We also need margin of safety
Combined LTV? Not for that house only, right?
Yes, combined all houses
depreciation should be added back in, but I have spoken with LOs who did not understand that.
Sometimes it’s also good to re-characterize repairs as capital improvements, to make a property look better.
They use rent not the profit/loss in the denominator. The issue is until you have two years of history, then they don’t add the rent to your income.
I’ve heard some use 75% of rent collected. I think that depends on the LTV ratio. I was able to use 100%.
some even use 65% or 50% (!), unless you can provide an expense ratio letter signed by a CPA. I was supposed to provide such a letter twice and was not able to get one. Basically no CPA will prepare such a letter without having done your tax return.
I tried to argue that the expense ratio can easily be read from my tax returns which I was happy to provide (as many years as they wanted, that property had 4 years history). The lender prided themselves not to request tax returns for their loans, they rather turned my loan down. I think this lender was AngelOak. Another lender, Impac, also wanted the expense ratio letter. No loan granted.
Maybe time to hire a CPA.
I have had one for 25 years doing my taxes.
East West Bank is pretty good at 60% LTV , easy qualify and their rates are
30 year fixed 5.125
15 year fixed 4.375
With 0.5 points origination. Only thing is they are slow around 60 days to close, but they documentation is very low