Buying without counting towards DTI

[Rick Albert]

Hello!

I am wondering what the work around is to purchase properties without it counting towards my DTI. Because of how my Schedule E is with all of the write offs, it throws off what I can qualify for.

One thought I had was start purchasing under an LLC and have the LLC take out the loan. I'm getting conflicting information on whether or not it will work because I would the sole owner of said LLC.

Any advice would be appreciated. I buy all over the United States and plan on buying at least 2-4 more over the next 12 months.

Thanks!

[Robin Simon]

Quote from @Rick Albert:

Hello!

I am wondering what the work around is to purchase properties without it counting towards my DTI. Because of how my Schedule E is with all of the write offs, it throws off what I can qualify for.

One thought I had was start purchasing under an LLC and have the LLC take out the loan. I'm getting conflicting information on whether or not it will work because I would the sole owner of said LLC.

Any advice would be appreciated. I buy all over the United States and plan on buying at least 2-4 more over the next 12 months.

Thanks!

You should look into DSCR Loans - many investors like yourself typically move to this loan product once they max out with DTI/qualifying conventionally - a bit higher in rate than conventional mortgages - but no DTI ratio or tax returns/income verification makes a much easier qualification process and LLCs are 100% ok (even as sole owner) and actually often preferred.

PS - published a 10-part article series here on BP last year on everything you'd want to know on these loan types - sharing links below, hope it can help!

DSCR Loans: What Are They And How To Get The Best Terms

https://www.biggerpockets.com/...

DSCR Loans: How To Use Pro Strategies To Save More And Make More

https://www.biggerpockets.com/...

Multifamily DSCR Loans: A New High-Impact Loan Option For Real Estate Investors?

https://www.biggerpockets.com/...

12 Frequently Asked Questions (And Answers) About DSCR Loans

https://www.biggerpockets.com/...

8 More Commonly Asked Questions and Answers to DSCR Loans

https://www.biggerpockets.com/blog/eight-questions-and-answe...

What Documents Do You Need for a DSCR Loan?

https://www.biggerpockets.com/blog/what-documents-do-you-nee...

BRRRR Loans: What Are the Options, and How Do DSCR Loans Stack Up?

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

Short-Term Rental Loans: What Are the Options and How Do DSCR Loans Stack Up?

https://www.biggerpockets.com/blog/short-term-rental-loans-a...

DSCR Loans: Terms to Know When Working With These Popular Rental Loan

https://www.biggerpockets.com/blog/dscr-loans-terms-to-know

What’s Next For DSCR Loans? Updates For 2024 and Beyond

https://www.biggerpockets.com/blog/what-is-coming-in-2024-fo...

[Brandon Croucier]

DSCR Loans are the perfect product for you, they do not take into account your income..

We strictly look at the properties income! Would love to connect and see how the product works for your goals.

[Andrew Zamboroski]

If all you're concerned about it growth, DSCR loans would help you scale your portfolio without a DTI constraint (let me know if you want more info there). Qualifying on rents covering expenses versus your income is a nice feature!

[Rick Albert]

I understand DSCR loans when buying, but let's say that I later on buy a new primary home. Would these loans count towards my DTI?

[Stacy Raskin]

Some lenders report to the credit bureaus for DSCR loans and some don't. If they report to the credit bureaus it will affect your DTI as your DTI is calculated based on what's on your credit report compared to your income. Most lenders sell their loans on the backend and some sell to different investors so they don't always know for certain who it will be sold to / if it will reported on your credit report as some report on the backend, some don't.

In case helpful, more info on DSCR loans: DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further. 

[Erik Estrada]

Quote from @Rick Albert:

Hello!

I am wondering what the work around is to purchase properties without it counting towards my DTI. Because of how my Schedule E is with all of the write offs, it throws off what I can qualify for.

One thought I had was start purchasing under an LLC and have the LLC take out the loan. I'm getting conflicting information on whether or not it will work because I would the sole owner of said LLC.

Any advice would be appreciated. I buy all over the United States and plan on buying at least 2-4 more over the next 12 months.

Thanks!

The main issue you will find is most DSCR loans are fully recourse and require a PG. Many conventional lenders may count that debt against your DTI when buying a primary home. Have you looked into doing a bank statement loan or P&L only loan instead?

[Ryan Fox]

@Rick Albert- One way I've found around this is to take a loan against a stock account.  Costs nothing to set up and it doesn't go on your credit report.