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

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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!

{ 11 comments… add one }
  • Midwestern LandlordNo Gravatar December 21, 2015, 9:33 pm

    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 option.

    Anyone who has gone through the loan process recognizes that it is a pain. But well worth it when you can lock up a mortgage for 30 years fixed (at historically low interest rates that are still available). That is an asset instrument in and of itself when you take into consideration inflation over a long period of time. Some people have the philosophy of paying off their rentals at an accelerated pace. I take the opposite approach. The 30 year fixed interest rates that I have are a gift. And I plan on leveraging that gift for the life of the loan.

    • FI FighterNo Gravatar December 23, 2015, 6:43 am

      Midwestern Landlord,

      From my own experience, yes, I’ve found that it can be difficult to get more loans after 4, and especially tricky after 10.

      Definitely, the key is to keep trying and never give up with REI. For the right deal, you should eventually be able to find someone to lend to you.

      Your strategy of locking down fourplexes is one that I’ve always been drawn to… Unfortunately, where I live, that boat has sailed and a 4 unit goes for well north of $1MM now… In some areas, north of $2MM…

      I also look at a 30 year fixed mortgage at a low rate as a wonderful gift! That’s partially why I was so keen on executing two separate cash out refis… Similar to your thought, my plan has never been to aggressively pay down those mortgages. My own preference has been to pull out my initial downpayment and let my tenants pay off the loans.

      Best wishes!

  • JoeNo Gravatar December 22, 2015, 8:18 am

    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 only have 4 fannnie mae loans so far so this has yet to be an issue so far. Personally I see there being 4 options after hitting the 10 loan limit.

    1. Use commercial financing to continue ramping up the business by looking at larger multi properties. There are massive investing opportunities in apartment investing space. Mostly because you can increase the value of the property by increasing the NOI. I’m talking looking at properties that are 10, 20, 50 units.

    2. Start buying properties cash or paying off existing loans. I would assume by the time I have used 10 loans I will be pretty rich. I’m thinking 10 loans will equate to 30-40 units. Use existing cashflow to create debt paydown snowball.

    3. This option is a hybrid. Use a portfolio loan to refi the existing 10 loans. Then you have 10 new fannie loans ready to go to use on residential properties.

    4. Get creative by pulling on equity partners. Put loan under equity partners name. Once you have a bunch of equity partners you can buy out their portion of the house using a portfolio loan.


    • FI FighterNo Gravatar December 23, 2015, 6:47 am


      Definitely, the sky is the limit with REI… No one says you have to stop at 10, and you’re right, this article was more geared towards those investors just starting out and trying to figure out the hurdles to first get to 10 loans…

      For the most determined and motivated, you’ll probably want to keep going, especially if your first 10 deals are producing wonderful returns.

      In the article, I did touch upon commercial loans, partnerships, etc.

      Paying off loans is another great option, and like you said, once you get to 10, you should be generating good cash flow and somewhat “wealthy”.

      Personally, I am a huge fan of partnership deals! If you run out of loans, you can always find a partner to take on the loan, and you can handle PM chores, or find a compromise that equally benefits both parties…

      Lots of creative avenues to keep going in REI…

      All the best!

  • mikeNo Gravatar December 22, 2015, 9:42 am

    “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!

    • FI FighterNo Gravatar December 23, 2015, 6:49 am


      Great call on UUUU! You nailed it!

      Funny, I just got off the phone with an industry “insider” and we were both saying the same thing on the call: “Why didn’t I buy more shares!?!”

      I really like this play long-term, so I might just hold on until the uranium market turns around…

      But booking profits is always a great strategy.


  • MikeNo Gravatar December 22, 2015, 11:45 am

    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. backed requirements) and evaluate risk based on that the bank deems important.

    • FI FighterNo Gravatar December 23, 2015, 6:52 am


      When an investor encroaches 40% or higher on DTI, the most frustrating thing you can face is finding a lender that won’t approve a loan b/c they won’t count your rental income to offset your debt burden…

      I’m sure it’s different from lender to lender, but I’ve found that the easiest way to navigate through this headache is to simply have 2 years of landlord history on your tax return.

      Plain and simple.

      Once you can prove that, ALL rental property debt gets nulled out and only your own personal debt is accounted for in the calculation…. That removes a tremendous hurdle…

      But the most productive way of solving this problem (waiting 1+ years can often times be too long) is to just keep shopping around, because in my own experiences many lenders will offset the debt even without 2 years landlording history… I just bring that up b/c many of the big banks refuse to budge on that requirement.


  • No Nonsense LandlordNo Gravatar December 23, 2015, 7:12 am

    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

    • FI FighterNo Gravatar December 23, 2015, 7:15 am


      Thanks for chiming in. If any prospective investor follows your tips above, they will indeed create lots of wealth and be on the path to early FI!


  • george puckNo Gravatar December 24, 2015, 9:44 pm

    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 thing my wife and I have done is buy a property as owner occupied, live there a year or so, buy another house and move to the next. 3 properties, 4 units over the last 3 years.

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