My Bank Denied My Rental Property Loan Because of My Tax Returns. What Now?

Brandon Huynh is a Houston mortgage loan officer, NMLS #2522494, with Lock It Mortgage, a trade name of Swift Home Loans, Inc., NMLS #2075228. He helps self employed buyers, real estate investors, and foreign national buyers, in English and Vietnamese. Licensed in 40+ states.

Call Brandon, 832-997-1527

Why the Bank Said No on Your Rental

Your bank was not really looking at the rental. It was looking at you.

When you own a business, or a few rentals, your CPA writes off everything the law allows. That is smart tax work, and you should keep doing it. The trouble shows up on the loan side. The bank reads your Schedule C and your Schedule E. Then it counts only the income left after all of those write offs. That number is often much lower than the money you really live on. So the bank sees a small income, and you see a full bank account.

Then there is the debt ratio. The bank adds up what you owe each month, and it compares that to the income it just counted. Every rental you own adds its payment to that list. The rent helps, but it does not always help enough. After a few rentals the ratio hits the bank's limit. The next deal gets a no, even when the deal is a good one.

So pull out your denial letter and read the reason on it. That reason tells you which fix fits. Maybe it says your income was too low. Maybe it says your debt ratio was too high. Either way, you are in the right place, and neither one means the deal is dead.

How a DSCR Loan Looks at the Deal Instead

DSCR stands for debt service coverage ratio. The name sounds worse than the math.

You take the rent the property brings in. Then you divide it by the full payment on that same property. The full payment is more than the loan. It also takes in the property taxes, the insurance, and any HOA dues. If the answer is 1.0 or more, the rent covers the payment. The deal stands on its own two feet. If the answer comes in under 1.0, the rent is not quite carrying the payment yet. That does not always end the conversation, but it does change it.

That is the whole test. No tax returns, no W2s, and no pay stubs. Your own debt ratio stays out of it. Houston DSCR loans were built for the exact person your bank just turned down.

The shift here is worth sitting with for a second. Your bank asked whether you can carry the payment. A DSCR lender asks whether the house can carry it. Same house, same rent, and a completely different answer.

If you want to see where your deal lands, run the rent through the DSCR calculator before you call me. Or just send me the rent and the address, and I will do it with you.

Why Houston Taxes and Insurance Matter in the Math

This is where a Houston deal can get tight.

Taxes and insurance sit inside the payment the ratio uses. So they matter just as much as the loan does. In Harris County and Fort Bend County they can take up a real share of that payment. A deal can look fine on rent alone. Then the taxes and the insurance go in, and it comes up short.

Flood zones matter too. If the home sits in one, the lender will want flood insurance. That raises the payment the rent has to cover.

None of this kills a deal by itself. It just means I want the real address early. With the address I can look at the whole payment, instead of guessing at it. Two homes can rent for the same amount and still land in different places on this math, and the taxes are usually why.

What a DSCR Loan Will Not Do

A DSCR loan is for rentals only. You cannot use one on a home you live in. There is no way around that rule, so please do not let anyone tell you there is.

Say you are buying a duplex, and you plan to live in one unit. That is house hacking in Houston, and it runs on a different set of loans.

And if the home you want is for you and your family, a DSCR loan is not the tool. If your tax returns are the problem there, a bank statement loan is usually the answer. It counts the deposits in your bank account instead of your returns. I wrote a side by side on whether a DSCR or bank statement loan fits better. It is worth a few minutes before you pick one.

Can You Close in Your LLC?

Most of the time, yes. Many DSCR programs let you close in an LLC, and plenty of investors like it that way. Some lenders charge a small fee to close in an LLC. So ask about that fee up front, and get the number in writing.

What I will not do is tell you how to set the LLC up, or how it changes your taxes. That one belongs to your CPA or your attorney. I will tell you how the lender treats it. For the longer version, read my post on closing a DSCR loan in an LLC.

What to Send Me About Your Denied Deal

If you have a deal you are trying to save, send me these. Then I can tell you quickly where you stand.

• The denial letter, so I can read the real reason
• The property address
• The lease, or what you think the place will rent for
• Your LLC papers, if you plan to close in one
• Recent bank statements, so we can talk about reserves

Reserves are just money left in the bank after closing. Every program asks for a different amount. So that part is a conversation, and not a fixed number I can give you here. The same goes for your credit. It still counts on a DSCR loan, and we will look at it, but it is not the write off problem that stopped you at the bank.

I know you are probably on a clock with the seller. So send me what you have, and we will start there. You do not need the whole file to get a straight answer out of me. If the rent and the payment are close, I will say so, and I will tell you what would have to change.

If you want to see how one of these plays out from start to finish, here is a sample case of an investor buying a sixth rental.

Frequently Asked Questions