Posted by Frank Chin on January 23, 2002 at 20:35:38:
Hi Laura:
I ran into this DSR problem with the banks early on, in the early 80’s when interest rates were over 16%.
As you said, when the banks added up all of the rental income, knock 25% off, combine that with your salary, and compute a ratio of that the mortgage payments, I was tapped out at three properties.
Now, we’re talking about conventional loans that banks sell to the secondary market.
I was able to get beyond that quite by accident. I decided to go for REO at auctions simply because I could get it so much cheaper, and thus cash flow so much better. But I was amazed that when the REO bank provides the mortgage, the normal DSR rules did not apply because the bank is putting the loan in its own portfolio.
The banker said the only criteria was the buyer has a certain income and good credit score.
Another way is to purchase multi familes with commecial loans. The loan criteria is slightly different, and is dependent on the cash generating capacity of the property itself.
There are also “no doc” loans that requires as low as 10% to 20% down payment or equity from certain banks. Most “No doc” loans usually require 40% down though. These loans depend solely on the appraisal of the property, and DOES NOT take ANY INCOME, thus DSR, into account. The rates for the 10% to 20% variety are slightly higher though than conventional loans. At 40%, the rates are about half a percent higher than conventional.
I am not a “subject to” expert, so others may comment on the methodology of taking over loans.
All in all, there are many ways to surmount the barrier.
Frank Chin