Are you a homeowner looking to buy a new property but have a high debt-to-income (DTI) ratio? This may make it difficult to get a loan, but it's not impossible. In this Q&A session, Ian asks about harvesting equity from his duplex to buy another property. He has good credit and W2 income, but his DTI is tight. The panel discusses different options for taking out equity and buying a new property.
Equity Line of Credit
The first option is to go to a local bank, credit union, or regional bank and see if you can get an equity line of credit (HELOC). A HELOC is like a checkbook that allows you to borrow money as you need it, rather than taking out a full loan amount and paying interest on it from day one. Typically, equity lines or HELOCs will go up to 80% on a non-owner occupied property. However, if your DTI is high, you might need to look for other options.
Refinancing
If your DTI is still too high, you might consider refinancing. However, before doing so, it's important to know the interest rate on your first mortgage. If your rate is low, like 2.6%, it may be better to keep it and go with the HELOC. Refinancing can be costly, and it may not make sense to refinance your cheap debt.
DSCR Loan
Another option is a debt-service coverage ratio (DSCR) loan. DSCR loans are projection-based loans where you can use your projected annual revenue from the short-term rental property to qualify. Typically, DSCR loans require a 20% down payment, but some lenders are still offering 80% on short-term rentals. However, this percentage is getting cut back, so it's best to prepare for a down payment of 20-25%.
Long-Term Rental DSCR Loan
If you plan to rent out the property for the long-term, you can qualify for a long-term rental DSCR loan. This type of loan doesn't require a lease agreement, but instead uses a rental survey to determine whether the property qualifies. To qualify, the projected annual revenue from the short-term rental must be similar to the long-term rental rate.
Bridge Loan
If the property you plan to buy needs a lot of work, you can consider a bridge loan. A bridge loan covers the purchase and repair costs of the property, and you'll have 18-24 months to fix and furnish it. After 12 months, you can put the rental income on your tax returns, which can help with your DTI ratio.
Conclusion
In conclusion, there are many ways to take out equity from your property to buy a new one. The best option for you depends on your specific situation. If you have a high DTI, you might want to consider an equity line of credit, DSCR loan, or long-term rental DSCR loan. If you plan to fix up the property, a bridge loan might be the best option. It's always a good idea to talk to a lender and explore your options before making a decision.