Author Topic: Debt to Income Ratio Hindering Investment (even though I have no debt)  (Read 1184 times)

ontheheel

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Needing some mortgage advice. We just sold our first rental property and are doing a 1031 exchange into two properties. We are running into a potential issue with our debt/income ratio, even though I have zero debt. The problem is that lenders count military base housing rent price toward my total debt to income, and living in Oceanside, CA with $3200 monthly base housing leaves only about $1600 available to service other debts (aka, the new properties). To explain how the housing process works, I receive a tax-free housing allowance that goes 100% straight back to base housing - I never see the money other than a notation on my paycheck.

That means we max out at about $250k worth of properties if we put down 25% at current mortgage rates. Weíre under contract on a $140k property right now (in Norman, OK), which would only leave $100-110k Önot ideal. The lenders can count rental income from the property, but we close on the first property in early May, and must identify the second property by April 20th to stay in bounds on the 1031 exchange, therefore we wonít be able to get the first house leased before going under contract on the second to count that income.

Any advice on how to proceed? Need some creative ideas, especially on how to maneuver my debt to income ratio in this situation. Not looking to take out mega millions, but weíre looking for properties in the $120-150k range.

Does this make sense?

SwordGuy

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If you transfer to a new duty station, the government won't pay the mortgage where you don't live anymore.  You'll get a housing allowance based on where you are.  And, if you're in on-base quarters, would you get a housing allowance at all?    I think that's why the banks count it as debt -- because you owe it, not the government.

ontheheel

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Right, and I understand that - Iím trying to figure out creative solutions to this problem. Iíve got money to invest, excellent credit, good income, but am bumping against this ceiling. This was an unanticipated road block.

Two mortgage brokers I spoke with today said they might be able to count anticipated rent towards income, based upon the appraisal, but thatís up in the air. If that goes through, itís a slam dunk. If it doesnít, I donít know what to do.

midwesterner1982

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First of all, congrats on the RE win!
I have several rental mortgages through the community bank from where I grew up.  Because they know me, like me, and know I'm very low risk for them it's a win-win situation.
  • I get commercial loans through them so I can buy through the LLC
  • It doesn't show up on my personal credit report at all
  • I'm not limited to a certain 4 or 10 mortgages quantity that the gov't dreams up
  • The paperwork required by my bank is only my prior year's tax return, and my personal balance sheet.
Compare that to qualifying for Fannie/Freddie!  I will say that the terms are not always as favorable as the 30 yr fixed rate from Fannie/Freddit but it's close enough for me.
Your brokers are only checking boxes on the page to see if you qualify for the gov't backed loans but there are more options available.  I'd suggest speaking to a broker capable of thinking outside the Fannie/Freddie box or start looking other places yourself.  Try to find a broker that works with investors and not just homeowners as they'll be used to the game.  Bonus if the broker also owns rental properties themselves as you can then earn a bridge into his/her network of contacts.  This is a huge benefit if you find the right person!
« Last Edit: April 02, 2018, 11:41:05 PM by midwesterner1982 »

clarkfan1979

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Find a broker or a lender that deals with non-traditional financing (non Freddie mac or fannie mae). The rate will be higher and you will have to use your existing rental properties as collateral. I would only do the creative financing if the rental was a killer deal. If it's an average deal, I would hold out until you can get traditional financing at lower rates.

ontheheel

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Thanks yíall for the responses, and apologies for my late reply - Iíve been in the field all week and out of reach.

We were able to find a reasonable solution that still allows me to get a conventional mortgage!

After pushing back a little on the broker, they were able to apply ďanticipated rental incomeĒ to my income side of the ledger, even though the property is not yet leased out. This only made sense to me, since Iím not buying second and third vacation homes that will be a drain on my wallet, but am instead investing in income-producing properties. Since my expected rental income will be close to double my mortgage/taxes/interest, it ends up being a wash (50% debt-income rule of thumb in effect).

They will get this when they do the appraisal by running rental comps for the area.

I hope this is helpful to anyone else who finds themselves in a similar situation. One thing Iíve learned working in a giant bureaucracy is to gently but firmly push back when encountering resistance, especially when dealing with other bureaucracies. Thereís oftentimes ways to do things in a nonstandard approach, but people arenít always willing or knowledgable enough to help youÖunless you keep asking until you get a suitable answer. Doesnít always work, but I canít count how much money and how many headaches  thatís saved me over the years.