Made $350K, qualified for $95K mortgage

[FallenTimber]

My wife and I own a business that brings in around $250-350K annually, with the latter being the most recent year.

We’re looking to build a 1,600 square foot home. Blueprints are done, utilities are in, subcontractors are lined up, we’re ready to break ground. We own the land (appraised at $600K) free and clear.

We went to the bank to take out a $500K construction loan. The bank told us “Unfortunately, like many business owners, you have a CPA who’s really good at their job, but we can only accept $96K of income and qualify you for a $92K loan.”

Gah.

We have a mortgage balance of $150K ($1,500/mo) and an investment townhouse with a balance of $150K ($1,200/mo). Once the new house is built, we project an additional $100K annual revenue from renting them out. Hence, we don’t want to sell either as they’re lucrative. The bank won’t accept that income projection either of course, despite having past rental history.

We’re looking into bank statement mortgages but finding they’re only offered on mortgages, not construction loans. We’ve followed the strategy of maximizing retirement and HSA contributions for the past decade, and now realize we’ve shot ourselves in the foot by doing so.

We’re feeling discouraged and wondering if this is a sign to not build, or if it’s simply a hurdle along the way. If anyone has any ideas for moving forward, I’d sure appreciate the insight.

[GilesMM]

Not clear what the problem is. Does “brings in” mean revenue? And your CPA cleverly works that down to under $100k taxable income? Even so you should be able to borrow 3x that. Something is missing. Talk to more lenders.

[AMandM]

If your only allowable income is $96k, then a $92k loan in addition to the existing $300k balance on your other mortgage doesn't seem out of whack to me. But not counting the existing rental income does seem wrong. Could you do a cash-out refinance on the townhouse using the townhouse rental income, and pay for your construction with that?

[ToughMother]

MMM has an article within the last year of how he used a loan against his investment account to pay for a house. I’ll come back to stick in a link but you can do a quick search for it.

[reeshau]

You stopped me at $500k for a 1,600 sq ft house, not including land.  Are you having to run utilities to it?

$312.50 per square foot isn't astronomical, but it's quite a bit above average.
  And the rate of home building has gone down, so I don't expect there would be a shortage of workers or materials.

[Laura33]

Shop around for different lenders -- you need one that is used to dealing with small business owners.  A standard lender will look at your reported income and existing debt and say "$100K income with $300K already in debt, that's a lot, we can only give you $100K more." 

One thing I'm not clear on:  are you currently renting one property and living in the other?  I'd think you'd at least be able to find a lender who would give you credit for the rent you are already receiving from the investment property.  I'm not at all surprised they won't give you credit for future rent from the home you're living in, though -- they're always going to base loans on documented income, not hypothetical future income.

Other option is to do a cash-out refinance on the other mortgages, depending on the amount of equity you have there. Which goes back to:  you need a mortgage broker who will work with you and find more creative options, not a bank that will just treat you like any other W-2 employee.

 

[Paper Chaser]

Debt to income way out of whack? If you already own two properties with some debt, plus any other debt that's going to make the healthy income a lot less healthy

[FallenTimber]

Thanks for the feedback so far. I’ve spoken with 4 lenders now who say the construction loan aspect of it complicates it even further.

We’re renting the townhouse full time ($2,500/mo) but we just bought it in June, so not enough history to count the income. We also rent our primary residence out when we travel, which generates $30K annually.

We have approximately $500K equity in the primary, and $65K equity in the townhouse. The lenders have told me that a HELOC or cash out refi would simply present the same issue in terms of Debt to Income ratio and we wouldn’t get approved.

I’ll look into MM’s article on borrowing against investments. Most is tied up in retirement.

As for the cost of the house… this is for the least expensive modular option available. Stick built homes start at $400/square foot here. My friend is building his currently at $600/square foot. Ours will cost $550K including utilities, or $338/square foot.

We have plenty of income ($30K / month) but we’re an S Corp paying ourselves salaries, and not allowed to use the majority of the business income.

[mistymoney]

If your only allowable income is $96k, then a $92k loan in addition to the existing $300k balance on your other mortgage doesn't seem out of whack to me. But not counting the existing rental income does seem wrong. Could you do a cash-out refinance on the townhouse using the townhouse rental income, and pay for your construction with that?

this was a change when I was looking at multiunit buildings. I got a 3 unit as my first property about 30 years ago. 75% of rents were considered as income for the loan.

I sold that and got a single family. then I was looking into getting a 2 unit investment property and rents were no longer counted as income on any percentage.

Not sure why - but that was the landscape. I didn't buy.

[mistymoney]

We have plenty of income ($30K / month) but we’re an S Corp paying ourselves salaries, and not allowed to use the majority of the business income.

is that really a thing? I thought it was 60/40, with 60 being a "majority". Seems like you might want to give yourselves raises, but banks would like to see 2 years on new income for loan purposes.

Can get one of the 30k box homes off amazon while you wait so you can rent out 2nd property too.

[JLee]

We have plenty of income ($30K / month) but we’re an S Corp paying ourselves salaries, and not allowed to use the majority of the business income.

is that really a thing? I thought it was 60/40, with 60 being a "majority". Seems like you might want to give yourselves raises, but banks would like to see 2 years on new income for loan purposes.

Can get one of the 30k box homes off amazon while you wait so you can rent out 2nd property too.

Not to hijack, but do you have any direct experience with those?  I have family who could use one, if they're actually legit.

[wageslave23]

I would find a new lender.  You need to talk to the vp of a local bank. They can do portfolio loans. If you still can't, then you need ask the most reasonable lender what you need to do to qualify, i.e raise w2 income to $200k for two years, show another year of 250k profit, wait six months and the rental income will qualify, rent or stay with friends for 6 months so you can show rental income on your current residence, etc.  You can also talk to a knowledgeable mortgage broker, most are just salesmen and know very little, but some are very knowledgeable and can guide you.

[mistymoney]

We have plenty of income ($30K / month) but we’re an S Corp paying ourselves salaries, and not allowed to use the majority of the business income.

is that really a thing? I thought it was 60/40, with 60 being a "majority". Seems like you might want to give yourselves raises, but banks would like to see 2 years on new income for loan purposes.

Can get one of the 30k box homes off amazon while you wait so you can rent out 2nd property too.

Not to hijack, but do you have any direct experience with those?  I have family who could use one, if they're actually legit.

I think legit, but no experience! A lot of companies with them so competition is good for the consumer I think!

Been highly considering selling up the homestead and getting one of these on some piece of land somewhere...

[FallenTimber]

I would find a new lender.  You need to talk to the vp of a local bank. They can do portfolio loans. If you still can't, then you need ask the most reasonable lender what you need to do to qualify, i.e raise w2 income to $200k for two years, show another year of 250k profit, wait six months and the rental income will qualify, rent or stay with friends for 6 months so you can show rental income on your current residence, etc.  You can also talk to a knowledgeable mortgage broker, most are just salesmen and know very little, but some are very knowledgeable and can guide you.

Great ideas here and perspective. Much appreciated. I’ve spoken to two brokers today who both suggested a Bank Statement Loan Cash Out Refinance (that’s a mouthful) on our primary residence. No tax returns needed, just bank statements. And no construction loan, just cash to build the new house.

The portfolio loan is intriguing. Thats what I had envisioned when working with a local bank, but I just thought maybe those may not exist anymore. I’ll look into that as well.