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321-239-2781NMLS # 1922428
321-239-2781NMLS # 1922428
English EN Portuguese PT Spanish ES

In this series of guides (“Lending in the Time of COVID-19”), we explore your mortgage loan options, despite the COVID-19 pandemic.  Creative and flexible loan solutions are still available, and we continue to monitor the situation and keep our finger on the pulse as to who is lending.  To access all the volumes in this series, go to our “Series” page here.

As any real estate investor in residential rental properties will tell you, finding the right lender is crucial to ensuring your project is profitable.

Finding the right financing was particularly challenging though during the first quarter of this year, as many lenders suspended their investment property loans due to COVID-19.

But, the good news is more and more lenders have been resuming their residential real estate investment loans.  Not only are these loans back, but they are back at a high level of flexibility and creativity. Seasoned investors as well as first-time investors are eligible. Short-term bridge loans and longer-term loans up to 30 years are back on the menu. And, experienced investors have the additional option of qualifying solely based on the property’s income, not on their personal income.

Whether you are looking for funds to purchase, refinance, or renovate a single rental property or multiple rental properties at once, you now have a multitude of options.

In this guide, we focus on four specific options to help you decide which track is best for you.

Program #1: Single Rental Property (“DSCR Loan” or “No Ratio Loan”)

Single property loan (DSCR or no ratio loan)

The “DSCR” or “No Ratio” program is for seasoned investors and focuses on the property’s income, not the investor’s personal income.

Who is this program for?

  • This program is for experienced real estate investors looking for a streamlined loan application process to purchase or refinance a single rental property.
  • Under this program, the lender does not require that the borrower’s debt-to-income ratio (DTI) be below a certain level, hence the term, “No Ratio Program.”
  • Since the lender will not calculate the borrower’s DTI, there is no need to provide tax returns, W2s or other income-related documents.
  • Instead, the lender focuses on the property’s income potential compared to the property’s expenses. This ratio is known as the debt service coverage ratio (DSCR), hence why this program is also known as the “DSCR Program.”

How does this program work?

  • Bella is an experienced real estate investor who wants to purchase Property A to add to her portfolio of rental investment properties.
  • Property A is a short-term rental property, which Bella will rent out through Airbnb or VBRO.  (As a great feature of this program, lenders not only accept rental properties that operate on traditional annual leases, but also short-term rental properties.)
  • On the loan application, Bella will not have to provide any employment or income information about herself.  Nor will she have to provide any tax returns, W2s, or paystubs.
  • Instead, the lender will look at how well Property A cash flows by conducting a special appraisal and rental survey (Fannie Mae Form 1007) to calculate Property A’s DSCR.
  • DSCR, which stands for debt service coverage ratio, is just a fancy way of determining whether the property generates enough cash flow to “service” or pay for the property’s associated expenses.  
  • The higher the DSCR, the better the property cash flows.
  • The particular lender that Bella applied to requires a DSCR of at least 1.15.  
  • The lender calculates the DSCR by dividing the gross rents of Property A by the principal, interest, taxes, insurance, and association fees (PITIA) of Property A.
  • The appraisal indicates that Property A’s gross rent, according to the current market, should be $1,150 per month, and the lender calculates Property A’s PITIA to be $1,000 per month.
  • Thus, Property A’s DSCR is 1.15 ($1,150/$1,000), and Bella qualifies for the loan.

What are some of the other highlights of this program?

  • This program is available for purchase transactions as well as refinances, both rate-and-term and cash-out.
  • First-time investors are ineligible.  Typically, lenders will require that the borrower have a history of owning and managing commercial or residential investment real estate for a minimum of twelve months within the most recent three years.  Additionally, lenders may require the investor to own his or her primary residence.
  • Most lenders require a minimum DSCR of 1.10 to 1.15.  Some lenders are willing to look at properties that have a DSCR as low as 1.00.
  • Acceptable property types include single-family residences, PUDs, townhomes, condominiums (including non-warrantable condominiums), and 2-4 units.
  • Short-term rental properties are allowed.
  • The maximum loan amount is typically around $2 million, but some lenders will go higher.
  • The maximum loan-to-value (LTV) ranges from 65% to 70%.
  • Available terms include 30-year fixed-interest rate and 5/1 annual rate mortgage (ARM).  Interest-only payments are also an option. 
  • The minimum credit score to qualify is usually around 680 to 720.
  • Eligible borrowers include U.S. citizens, permanent residents, and non-permanent residents with U.S. credit.
  • The seller or other interested party may make a maximum contribution of 2% toward closing costs.

Program #2: Multiple Rental Properties (“Rental Portfolio Loan”)

Purchase or refinance multiple residential real estate investment properties

Like the DSCR/no ratio program, the rental portfolio loan for multiple properties focuses on the properties’ cash flow.

Who is this program for?

  • This program is for experienced real estate investors looking to purchase or refinance multiple properties (usually at least 5 to 7) under one blanket loan.
  • Like the DSCR/no ratio program for single investment property loans, the rental portfolio loan also does not require personal income verification.  No tax returns or other income documents are required, and no minimum DTI is required.

How does this program work?

  • Brian is an experienced real estate investor who currently owns 7 rental properties.
  • He would like to refinance the current mortgages on the 7 properties, which have different maturity dates and are with different lenders.
  • Brian would also like to acquire an eighth rental property to add to his portfolio.
  • As long as the 8 properties cash flow well enough to satisfy the lender’s minimum DSCR requirement, Brian will qualify for the loan.
  • Ultimately, Brian can consolidate all the debt, unlock his existing equity, and purchase the new property — all under one loan with one lender.

What are some of the other highlights of this program?

  • This program is available for purchase transactions as well as refinances, both rate-and-term and cash-out.
  • First-time investors are ineligible.  Typically, lenders will require that the borrower have a history of owning and managing commercial or residential investment real estate for a minimum of twelve months within the most recent three years.  
  • Most lenders require that each property in the portfolio maintain a minimum DSCR of around 1.10 to 1.25.
  • Acceptable property types include single-family residences, townhomes, condominiums, 2-4 units, and multifamily.
  • The typical loan amount ranges from $500,000 to $100 million.
  • The maximum LTV ranges from 65% to 70%.
  • Available terms include 5-year, 7-year, and 10-year fixed interest rate.  Interest-only payments are also an option. 
  • The minimum credit score to qualify is usually around 680 to 720.
  • Eligible borrowers include U.S. citizens, permanent residents, non-permanent residents, and foreign nationals.
  • Non-recourse options are available with standard carve-outs.

Program #3: First-Time Investor (“Full Doc Loan” or “Bank Statement Loan”)

Qualify for an investment loan based on tax returns or bank statements

First-time investors can get their foot in the door by qualifying based on tax returns or a lower level of documentation such as bank statements.

Who is this program for?

  • Unlike the DSCR/no ratio and the rental portfolio loan programs, which are for seasoned investors, this program is tailored for first-time investors.
  • Because they have no investment experience yet, these borrowers will have to provide some level of documentation of their personal income.
  • This program is essentially the reverse of the first two programs, where the lender looks at the property’s DSCR, not the borrower’s DTI.  Here, the lender looks at the borrower’s DTI, not the property’s DSCR.
  • Under the full document (or “full doc”) program, tax returns, W2s, paystubs and other income documents must be provided.
  • Under the bank statement program, only bank statements are required (typically 12 or 24 months), no tax returns or Form 4506-T required.

How does this program work?

  • Bonnie has never owned or managed real estate, and she wants to purchase her first rental investment property.
  • Her mortgage broker advises her that she can qualify based on her tax returns or her bank statements.
  • Since Bonnie is self-employed, she shows higher income through her bank statements than her tax returns, so she opts for the bank statement program.
  • Using the deposits and expenses shown on Bonnie’s 12 months of bank statements, the lender calculates her DTI as 40%.  
  • Because the lender’s maximum DTI allowed is 43%, Bonnie qualifies for the loan.

What are some of the other highlights of this program?

  • This program is available for purchase transactions as well as refinances, both rate-and-term and cash-out.
  • First-time investors are eligible (as are seasoned investors).
  • Acceptable property types include single-family residences, townhomes, condominiums, and 2-4 units.
  • The maximum DTI allowed is usually 43%.
  • The maximum loan amount is typically around $2 million, but some lenders will go higher.
  • The maximum LTV ranges from 60 to 65%.
  • 30-year fixed-interest rate term as well as 5/1, 7/1, and 10/1 ARMs are available.  Interest-only payments are also an option.   
  • The minimum credit score to qualify is usually around 680 to 720.
  • Eligible borrowers include U.S. citizens, permanent residents, and non-permanent residents with U.S. credit.

Program #4: Fix-and-Flip or Fix-and-Hold (“Bridge Loan”)

Fix-and-flip and fix-and-hold bridge loans

First-time and seasoned investors can get the immediate funds they need for their fix-and-flip or fix-and-hold projects.

Who is this program for?

  • This is a great option for investors looking to quickly purchase or refinance a fixer-upper to flip or rent.
  • To qualify for this short-term bridge loan (typically 1 to 2 years), no DTIs are calculated and no income documentation is necessary.
  • All experience levels are welcome, including those with zero experience.

How does this program work?

  • Bobby would like to purchase a fixer-upper and he is confident he can finish the renovations and sell it within one year.
  • The lender does not require income documentation; instead, the program is “stated income,” which means Bobby simply states on the loan application what his income is.
  • Even though no minimum credit score or experience level is required, because Bobby has a high credit score and fix-and-flip experience under his belt, he qualifies for 75% LTV to purchase the property, and 100% of his rehab budget is financed.
  • He opts for the 12-month term, and if he completes the renovations and sells the property in less than 12 months, he can prepay the loan with no penalty.

What are some of the other highlights of this program?

  • This program is available for purchase transactions as well as refinances, both rate-and-term and cash-out.
  • First-time investors are eligible (as are seasoned investors).
  • Acceptable property types include single-family residences, townhomes, condominiums, and 2-4 units.
  • There is no DTI requirement.
  • The loan amounts range from $300,000 to $7 million.
  • The maximum LTV is up to 75% for purchases and 70% for refinances.
  • For rehab financing, the maximum amount is 75% of after-renovated value (ARV) with up to 100% of the rehab budget financed, based on credit score and experience.
  • Because this is a bridge loan program, 6-month, 12-month, 24-month, and 36-month terms are available.  Payments are typically interest-only.  Note that under the longer options, some lenders may require that the property have a minimum DSCR.
  • To further streamline the process, instead of a full appraisal, some lenders allow a broker price opinion (BPO).
  • The option for no prepayment penalty is available.
  • There is no minimum credit score required.
  • Eligible borrowers include U.S. citizens, permanent residents, non-permanent residents, and foreign nationals.

Parting Words

Despite the coronavirus pandemic, there are still flexible and creative loan programs available to help achieve your real estate investment goals.

As the above four loan solutions demonstrate, investors do not have to go through the trouble of providing tax returns, W2s, paystubs, and Form 4506-Ts to qualify. Even first-time investors can get their foot in the door by simply providing bank statements to show their personal income. And, for those investors looking for a short-term bridge loan, neither DTI nor DSCR calculations are necessary. Adding further quickness, some lenders will forgo full appraisals for BPOs instead.

In short, investors looking for financing to fund their projects shouldn’t be discouraged if they can’t get approved for a mortgage loan.

Sometimes, it just takes finding the right lender with the flexibility to offer creative and innovative loan products.

Please contact us at 321-239-2781 or david@davidakrebs.com or by clicking here to learn more about these residential real estate investment loans, including interest rates and other details.

 

Continue exploring our “Lending in the Time of COVID-19” series:

PREVIOUS: “Creative home loan programs for self-employed borrowers” (Volume 2)

NEXT: “Foreign national loans for sunny Florida homes!” (Volume 4)

To access all the volumes in this series, go to our “Series” page here.