Home Equity Loans and Debt-to-Income Ratios

lbny_robMay 1, 2006

Hi, I am having a bit of a dilemma with the first attempt at securing a Home Equity Line of Credit.

We own and carry mortgages on two two family homes in a very viable Long Island community. Real Estate values have typically increased steadily and more significantly than national, state and even local averages.

Our first home, bought in 2000 for about $360K has about doubled in real value.

Our second home was purchased last year for about 800K and is probably worth close to 1 million even before we finish our planned renovations.

Both my wife and I have well paying jobs, near perfect credit and absolutely no outstanding debts i.e. car loans, credit card balances, etc.

On the first house, the market is such that when we move out of our part of the two family house to the second house, that rental alone will cover the mortgage with the current rental being pure income.

The second house has one rental that covers nearly half of the mortgage. The other part of the house, which we are renovating to move in is currently unoccupied.

In a few months, we expect to live in the renovated portion of the second house and have three rental incomes. Once in place, our monthly layout to cover the mortgage expenses will actually be less than some folks are paying around here for two or three bedroom rentals. So far, it sounds like a sound investment.

The problem is that because we are less about $2500 a month in rental income right now, our Debt-to-Income ratio is a few points too high.

We chose to go to the lender that holds our first mortgage and planned to draw an equity loan on that first house. Apparently, they look at the W2s to determine current salaries and take an average to the rental income from 2004 and 2005 and take about 80-90% of that figure as supplemental income.

What aggravates the problem is that in 2004, we had only one house and one rental income. In 2005 we had a second house after 6 months and that other rental income from that purchase for the same six months. Apparently, this lender averages out the 2004 figures (with one home and rental income) and the 2005 figure (with only six months of the new rental income) and comes up with the figure versus what we are currently getting each month now.

I understand that it is all purely speculative as far as the lender is concerned, but in a few months, we expect to have another $2500 a month in rental income from the third apartment and a few hundred more a month when our current leases are up in June. I also understand from this lender that our investments are also ignored in their figures.

Ultimately, if we had that third rental income, we would more than qualify for the loan, but because it is presently "speculative" we cannot get the loan figure we want in order to fix up the house, which would allow us to get that third rental going in a few months.

The lender we went to is a bank. I am wondering if banks tend to be more conservative than other lending institutes. Has anyone had similar experiences, and if so, how did they proceed?

The bank made one suggestion (actually two). The suggestion was to refinance our first mortgage, which would bring it up nearly 2 percentage points at the prevailing rates, plus all closing costs and fees. I can't seem too enthusiastic about that. The other was to find another institution (two other banks were named) that may have more lenient D-T-I figures or lower rates.

In a nutshell, we are not concerned about financial ruin. We have made some very smart investments over the years which allowed us to pool our resources into other smart investments. The HE Loan would be another investment that would put great touches on a nice house surrounded by extremely nice houses, thus increasing its long-term value and desirability. We just need a lender that is willing to look at our whole situation and make a decision, versus a two-year rental income scenario watered down to be far less than it has actually been.

Sorry if I went a bit long...just trying to not leave some information out.

Thanks,

Rob

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nancyinmich

You might try this in the Buying And Selling Homes forum, where mortgage folks will see it and jump in with suggestions.

    Bookmark   May 2, 2006 at 12:03AM
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steve_o

A couple of thoughts:

- the bank probably is not counting that third rental income because you don't have it. Renting is speculative. I don't know what the rental market is like on LI anymore, but around here it is not uncommon to see "For rent" signs on apartment buildings for months on end. There also are the expenses incurred as a landlord -- it's not all an income stream and that's why the bank discounts the income.

- another bank (a smaller, hungrier one) or even a credit union (if you can belong to one) might be a better bet for your business.

- a bridge loan might work for you; it would go on the equity you now have in your properties and carry you until the rental income is a reality.

    Bookmark   May 2, 2006 at 11:17AM
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lbny_rob

Steve, thanks for the input and the options.
I just spoke to another lender which does not prescribe to the same formulaic devices as the first lender. We only spoke about it thus far, so things have not been finalized.

At the suggestion of Nancy, I reposted this topic in the "Buying and Selling Homes" forum. In the interest of avoiding the duplicate posting, I'll maintain the thread in that forum.

Many thanks.

Here is a link that might be useful: This thread in the other forum.

    Bookmark   May 2, 2006 at 12:51PM
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