Real Estate Investing: Working Around the Underwriting Guidelines to Your Advantage


One common question that I get from real estate investors is — “How do I overcome the debt-to-income (DTI) ratio?” That, along with — “How do I buy more units and grow my business more quickly?

For anyone who has accumulated a few units in a reasonably short period of time, I’m guessing that these are problems that you’ve had to deal with yourself…


Addressing the first question, in a nutshell, the debt-to-income ratio (monthly debt service divided by gross income each month) is a common barometer that a lender uses to gauge whether or not an investor is well positioned, or “qualified”, to take on more risk (debt). Just like a stock investor wouldn’t be too keen on loading up on shares of a company with an extremely bloated balance sheet, lenders (especially post-subprime) are especially hesitant to approve lending to a borrower who already has too much debt on the books…

With the debt-to-income ratio, it typically starts to rear its ugly head as soon as we exceed 40%.

But as anyone involved with cash flowing real estate can attest to, not all debt is created equally! Yes, debt will ALWAYS be something that inherently magnifies risk, but I would argue that a real estate investor who carries $1MM in debt that is 100% serviced by free cash flow is in a far better position to manage the burden than say a homeowner who has to rely on their day job to make the monthly loan payments.

And if you’re an investor who has high aspirations and wants to scale quickly, you’re gonna need to take on more loans to reach your goals!

So, how do we get around the 40%?

The easiest way is to be able to show that you have 2 years (or more) of landlord history and experience. Basically, what this means is that you must be able to show the lender evidence of a rental property appearing on two separate tax returns.

Although obtaining 2 full years of experience can sound pretty rough (for anyone trying to grow and scale quickly, this is an agonizingly long amount of time to wait for seasoning, especially in the depths of a brutal bear market), like is often the case of real estate, the rules are malleable

I’ll give you an example:

My good buddy purchased his first rental property towards the end of 2013. He didn’t close escrow until December 30, 2013.

But because the transaction was completed and title had been transferred to his name, by the spring of 2014, he had to file his first rental property on his tax return…

In essence, my buddy was able to “work the system” (although unintentional), and gain credit for 1 full year of landlord history and experience, even though in reality, he was just getting started!

So, by the time he had completed filing his 2014 taxes in the spring of 2015, as far as underwriting was concerned, he was a landlord with sufficient 2 full years experience, so they were more than happy to waive any debt-to-income requirements (rental income could now be qualified and counted into the income statement to help offset debt service, which was not previously allowed) on any future rental property purchases.

Definitely, this is perhaps the quickest way to sidestep the debt-to-income barrier that many lenders force us to overcome.

However, the easiest way of getting around the debt-to-income issue is to just to keep shopping around, looking at different lenders…

Although debt-to-income is a common check for many lenders, not all will adhere to it so strictly. For instance, if you first approach the big banks (JP Morgan Chase, Wells Fargo, Citibank, etc.), you’ll quickly learn that they run tight ships, so getting your file cleared through underwriting may be challenging. But if you go with a smaller bank, or lender, you might just have some better luck…

In my own experience, I purchased Rental Property #3 in 2013 without first having cleared the 2 years of landlord history guideline… As I mentioned above, the big banks are tough, and they refused to lend to me… they claimed that I was “unqualified” because I carried too much debt and they refused to count my rental income. But I persisted, and ultimately chose to work with an out-of-state lender that was much more accommodating to investors. Without having really any landlord history, this particular lender was still willing to completely null out my debt because they understood full well that the cash flow I had coming in each month was more than sufficient to offset any “risks” to them.

You might have to get creative, but there are definitely ways to overcome the debt-to-income problem!

10 Loans

When it comes to residential real estate, Fannie/Freddie will let most qualified investors finance up to 10 loans. However, for some odd reason, they don’t put in any guidelines as it pertains to the nominal value of each property that you are buying…

In theory, you could take out 10 residential loans, and each property could be valued at $500,000/each… As far as underwriting is concerned, that’s no different, and the exact equivalent to another investor who chooses to invest in cheaper properties, and takes out 10 residential loans at $50,000/each

You would think that the latter investor should be more qualified to take on even more loans because the total nominal value of all their loans combined is substantially less than the former investor?


As far as underwriting is concerned, both investors are on a level playing field and present the same amount of risk…

10 = 10

No more.


With that knowledge in place, then, it really makes no sense for an early stage real estate investor to jump in too hastily and start burning through loans on some very cheap properties…

Further, if your aspirations are to grow and own as many units as possible, you really want to maximize those 10 loans as much as possible. As far as the guidelines are concerned, a single family home (SFH) is equivalent to a fourplex (above 4 units is technically commercial property and does not qualify for a residential loan). In other words, you could tie up 10 loans on 10 units, or stretch it out much further and finance 10 loans on up to 40 units

Depending on your location, it may or may not be worthwhile to focus more heavily on acquiring more units during the early stages of your real estate career. In my own case, homes in the Bay Area aren’t cheap (multi-family units don’t really cash flow either…), so my acquisition strategy has mostly been focused on snatching up affordable townhouses (1 unit per loan)… However, I do own some duplexes out-of-state, and if I was living in the Midwest, most definitely my strategy would be more predicated on accumulating as many units as possible with each loan.

Since the 10 loans is a fixed number, once you max out on that, you’ll most likely need to work with a portfolio lender to obtain financing on any additional properties. That, or you could migrate over to the commercial real estate space that only cares about the “income approach” and isn’t subjected to these same rules and regulations.

Reserve Requirements

Another important point to keep in mind is that underwriting guidelines tend to change once you’ve accumulated more than 4 units.

Typically, for loans #1 to #4, a borrower will need to come up with between 10% to 25% on the downpayment and be able to show sufficient reserves (PITI) for 3 months on each rental property owned.

Once an investor gets to loan #5 and beyond, the rules change and lending becomes more difficult. Typically, the downpayment will need to be 30%, and reserves (PITI) need to cover 6 months on each rental property owned.


With this knowledge in place, as mentioned previously, an investor probably wants to strategize their purchases by focusing on more expensive properties on the front-end of things. In other words, it makes more sense to utilize loans #1 to #4 (10% to 25% downpayment) to buy the more expensive: duplexes, triplexes, and quadplexes.

Save the cheap stuff for later.

It’ll be a lot easier to save up 30% for a $100,000 SFH than it will be to save up 30% for a $500,000 quadplex…


Underwriting can be tough at times, but as is often the case with real estate, there are typically alternative methods and solutions an investor can utilize to make the most of any situation.

It is important to know the rules of game well in advance so that we can define a gameplan and strategy to help us meet our goals.

Although I never did quite make it to 10 loans, I utilized the above methods to help me amass 8 rental properties and 10 units total in a span of about 3 years (2012-2015).

When I was most aggressive in 2013, it was beneficial to work with a lender willing to overlook my debt-to-income, and to also purchase a duplex with loans #1 to #4.

Lastly, if all else fails, it may not be a bad idea to also consider teaming up with other investors and forming partnerships. I’m personally involved in three side hustle deals, and to date, those might arguably represent my best assets.

Real estate can be extremely lucrative… But to meet your goals, sometimes you’ve got to be fluid and adapt to the rules, regulations, and guidelines.


Happy Hunting!

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Midwestern Landlord
Midwestern Landlord
4 years ago

Nice informative post FI Fighter. While technically one can get more than 4 residential loans, there are many Banks that will not underwrite more (even though not against secondary market rules). Real estate in many ways is a perseverance game. If one gets denied, keep trying. Great advice on maximizing those residential loans. Particularly the first 4. That is what I did by buying (4) four family apartment buildings. That works out a lot better than four houses for me here in the Midwest. Granted, other areas are so expensive that this may not be the best or most viable… Read more »

4 years ago

I would agree with you for the most part that 30 year conventional financing is a gift and great for beginning investors. That being said just because you have 10 loans doesn’t mean that you are done investing. There is no limit to the amount of commercial/portfolio financing you can get! These loans are given based on investor experience and the deal itself rather than DTI. Its important to know that these loans have harder terms than conventional because of shorter amortizations and higher interest rates. You can find portfolio/commercial loans by networking or cold calling 100 regional banks. I… Read more »

4 years ago

“The charts are looking spectacular for a bounce rally in UUUU. Ride it up to $2.70.”

New resistance is $2.42, take some profit off the table. But the charts were right that a nice bounce was in the cards!

4 years ago

I’m not sure I agree with your ‘2 full years’ of landlord experience playing onto the debt-to-income ratio. What the lenders look at for ‘income’ is the average of the last two year’s tax returns. So it doesn’t matter when you ‘become’ a landlord, what matters is the average of the last two years ‘claimed’ income, and weather it will cover the debt-to-income ratio they deem necessary. But like you said, there are many banks out there that will lend ‘portfolio mortgages’ that won’t hold you to the government backed requirements of 35-40% DTI. These are non-conforming (to the gov.… Read more »

No Nonsense Landlord
4 years ago

I was fortunate to have a decent w2 income, and low debt. The two year requirement is a problem though. I would not have been able to buy as many as I did, but I waited a year between purchases.

Get a high w2 income
Have great credit
Have low, or non-existent debt
Purchase when you have great cash flow

george puck
4 years ago

The monthly debt/income ratio is 43% hard cap for a conforming loan. question for you guys as I havn’t yet had to test this. We have one property that has been rented for over two years. So we were able to qualify for our third property using at least part of that income (I think it was 50% of rents for conforming). Once we rent our second property (and move into our third property), can we immediately count the income off of the second house? or does the two year seasoning period look at each property individually? Either way, one… Read more »