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Okay so I have two properties which I currently rent out but have been doing so for less than a year so there are no tax returns showing the rental income, just leases. I am trying to buy a 2nd home, and having issues w/ being denied due to my debt ratio. My credit is good (750), my assets are good, my job history is good, etc.. My only issue is my debt ratio. I tried to provide leases to my credit union, but since the leases are only for a 5 months period that I have owned the home, they divided that amount by 12 months to get a yearly average (which doesnt make sense to me because they are averaging it for months before I owned the home.. of course there was no income when I didnt own it, why not average by the amount of months its been rented currently???) .. By doing this, my debt ratio was now too high. The scenario is like this:
Property A - 110k mortgage ($700 payment) - rented for $950 per month
Property B - 313k mortgage ($1800 payment) - rented on short term leases, $1200 per week, past 5 months of total leases = $25,000
I have no other debt besides my car loan, and my student loans. Credit card debt is minimal, ie; 10-15 dollars a month. I keep low balances and pay it off monthly.
So my question is.. What do I do? Do I have any options left for finding a lender to appove me by accepting the leases I do have? Or do I give up? Will I have better luck w/ a bank or a broker based on this situation?
I personally can't make a meaningful comment without knowing your income. From my personal point of view, the debt looks pretty high, and short term leases may not give the lender a warm-fuzzy feeling. Know what I mean? You may have at least a month between tenants once their leases are up. Not just a month of paying the mortgage, but of paying all the additional expenses related to making the unit(s) ready to rent to a new person, advertising etc.
Having said that, ordinary tax payers sure have given the banks a load of money in terms of low interest loans and "bailouts." (not that I'm bitter or anything. ), I say that if YOU think you have enough income to pay your three mortgages and related expenses, you should look for a new lender. Some one will be um. . . brave enough to lend you more money.
I would advise this:
1. Pay off your credit cards and don't use them while you are looking for a mortgage. You apparently don't need to have a balance at all, so just don't use them while you're shopping for a loan. If you can't do this. . . well.
2. Pay off your student loans
3. Pay off your . . .
Actually, it does sound like you have quite a bit of debt. This may sound a little mean, but I would not consider you a good risk if I were a bank. Try to pay off some of that debt and save a good downpayment and THEN buy a house. With so much debt--sorry student loans, a car payment, mortgage 1, mortgage 2 and credit card debt does sound like and awful lot--how do you manage to save any money? What will you do if you lose a source of income?
On paper it looks like you have financed a lot of your life, so maybe you should pay a bit more off instead of borrowing more.
The debt ratio is high. However, you may have some luck with a mortgage broker. You may have to pay a higher interest rate due to the risk. there are ways to do it.
I would be careful as previousl;y stated, if one income goes what are you going to use to pay the bills?
that's the question you will get. Have an answer and it may float.
Well - both of the mortgages are covered and then some by the rental income, so I break even/make money on those. I have no mortgage/rent in my primary residence. My student loans I have always been told are silly to pay off when the interest rate is 2% (the balance is 10k left). And my credit cards currently don't have a balance anyway. So my only actual monthly payment is student loans - $150 a month, and the car $400 a month. So $550 a month out of pocket - the rents pay the mortgages - and my income is $80k per year. I guess I can see how the "rent" situation could be risky because it's not guarenteed, but I have not had a vacancy yet.
You need to talk to a mortgage broker. With no mortgage on your primary residence, and positive income on the rentals, you should be able to get a loan for a 3rd house. The mortgage companies only count 75% of the income on the rentals. That covers the cost of the properties. Ask the broker how to get things into a more positive stance. It sounds like a broker could help. Credit Unions are a bit stricter in the present economy. Good luck. let us know how it turns out.
You need to talk to a mortgage broker. With no mortgage on your primary residence, and positive income on the rentals, you should be able to get a loan for a 3rd house. The mortgage companies only count 75% of the income on the rentals. That covers the cost of the properties. Ask the broker how to get things into a more positive stance. It sounds like a broker could help. Credit Unions are a bit stricter in the present economy. Good luck. let us know how it turns out.
Very true. Credit unions are always more strict, but because they only buy quality loans and have less risk they offer some sweet deals. Banks and brokers are usually the same in fees/rates (I know there is a lot of emotion on which is better, in my experience it depends on the loan officer and not whether its a banker or broker) but "real" credit unions will usually be better than both.
What I mean by "real" credit union is one that actually holds the mortgage. Some simply outsource the mortgage division to a broker or banker and just slap their logo on the materials.
A broker would be a good option in this case. They can review the tax returns, rental agreement and other items and run it through an automated underwriting system. With the strong factors you might be able to get an approval where a credit union is usually much more risk adverse on investment properties.
Just make 100% sure you are ready if you have a vacancy for 4-6 months or if repairs are needed. Take it slow and be safe, much better than jumping in too fast.
Well - both of the mortgages are covered and then some by the rental income, so I break even/make money on those.
At least until the tenant stops paying rent, or moves out and trashes the place.
Quote:
My student loans I have always been told are silly to pay off when the interest rate is 2% (the balance is 10k left).
Not quite so silly now?
Actually, in any other position, I would agree - the mortgages are higher interest. But getting rid of that student loan will help your position, for what you want to achieve.
Quote:
I guess I can see how the "rent" situation could be risky because it's not guarenteed, but I have not had a vacancy yet.
"yet" being the key word here.
How well positioned are you to be able to repay this new mortgage if your tenants move out?
Your rent should not be disqualified, it should be used to offset the mortgage, not divided by the number of months received. That's why we take away 25% of the gross rent, to offset any potential vacancies.
It's late, so I am not running ratios, but if you have reserves after closing, depending upon the amount, that could very well be the winning ticket. Have someone that has the ability to underwrite and close your loan right in their office, take a look at it.
And one last thing......where is this 2nd home? and the logic of the second home? is it a ski resort, vacation area? or is it real close to where these investments are? Three properties in less than one year does warrant some scrutiny and there may be some convincing this is really a 2nd home.
Don't worry about paying off your student loans. $150 a month isnt going to change your situation much. You can always wait till your houses have been rented for a year. Otherwise, sounds like you're options are limited. I'm in the same boat...bought a duplex for $365 and debt to income ratio of 49%. Rent from other unit pays $1800 of my $2600 mortgage and I live in the other unit with a roommate paying $700 a month. See lots of potential properties that would easily cash flow and little risk of vacancy, but can't get financing.
I have no other debt besides my car loan, and my student loans. Credit card debt is minimal, ie; 10-15 dollars a month. I keep low balances and pay it off monthly.
uh........
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), I say that if YOU think you have enough income to pay your three mortgages and related expenses, you should look for a new lender. Some one will be um. . . brave enough to lend you more money.
This may sound a little mean, but I would not consider you a good risk if I were a bank. Try to pay off some of that debt and save a good downpayment and THEN buy a house. With so much debt--sorry student loans, a car payment, mortgage 1, mortgage 2 and credit card debt does sound like and awful lot--how do you manage to save any money? What will you do if you lose a source of income?
