Over the last five years both locally and nationally, we have experienced an extreme increase in interest in residential investment property purchases (1-4 family homes, including individual condominium and co-op units). The driving factor has been the substantial increase in annual rental income as well as the popularity and success of short-term rental earnings (Airbnb/VRBO). As the popularity of this real estate asset class has expanded so have the available financing options. As part of our new investor initiative, I sat down with Jordan Roth, vice president of FM Home Loans, to discuss the different ways an investor could finance their investment property. This is a summary of our conversation, edited for clarity.
Sapir Team: So, Jordan, tell me about what options are out there for investor-buyers looking to finance.
Jordan Roth: Well, the first option I’d like to inform your readers and clients about is the Full Income Analysis. What this is, is a loan that utilizes the borrowers’ annual income to qualify for investment property purchase. It applies both to salaried and self-employed people, with a maximum debt-to-income ratio of 43%. It’s attractive because you can vest in an individual’s name, LLC, or revocable trust, and also 75% of the proposed rent on the subject property can be used as additional supporting income. This is derived from the rental analysis section in the appraisal report. All mortgage product options are available for this type of loan, including fixed rate, adjustable rate, and interest-only. Additionally, a 40-year amortization schedule can also be requested. Another perk is that depending on the lender, there may not be a pre-payment penalty.
ST: That sounds great! What’s important to consider when choosing this type of loan?
JR: The borrower must put a minimum down payment of 25% and historically, have a credit FICO score of 680 to 720, depending on the lender. The assets they show must cover the down payment, closing costs, as well as six-month post-closing housing reserves for the subject property as well as any additional properties the client owns (including primary residence).
ST: You mentioned both salaried employees and self-employed individuals can apply; are there any differences in the requirements for these two types of workers?
JR: Yes. For a salaried person, this requires a review/analysis of their pay stubs, W-2s, and Tax Returns (generally last two years). For a self-employed person, this requires review/analysis of the last two years of Personal and Business Tax Returns (if applicable) as well as K-1s if received.
ST: What if we have clients whose personal income will not qualify for financing associated with an investment property purchase?
JR: In that case, I’d look into Debt-Service-Coverage-Ratio (DSCR) Financing. In this type of financing option, the Qualifying standard is based on the rental analysis from the appraisal report as compared to the overall qualifying standard. Ideally, you want no less than “1 to 1” debt-service coverage. This means at a minimum, the proposed rental income for the property must be equal to the housing expense, which includes mortgage payments, property taxes, HOA (if applicable), and homeowners’ insurance. There are certain programs out there that will go as low as .75% coverage.
ST: And what are the requirements for this one?
JR: In this case, the minimum FICO score must be 660 (although some lenders will go as low as 620), the minimum down payment here too, is 25%, and the necessary assets must cover the down payment, closing costs, and generally two months’ post-closing housing reserves for the subject property as well as any additional properties owned.
ST: What else should we know about the DSCR option?
JR: Here too, all mortgage product options are available including fixed rate, adjustable rate, and interest-only. A 40-year amortization schedule can also be requested. In this option, vesting can be in an individual’s name, LLC, or revocable trust just like with the Full Income Analysis, but there is a pre-payment penalty of one to five years required.
ST: What if our investor is a foreign national? They don’t have FICO scores or US tax returns.
JR: Correct. In that case, we have Foreign National Financing. This is available for non-US Residents, permanent resident aliens, or Visa Holders. Again, the borrower can vest in the individual’s name, LLC, or revocable trust, and generally the best mortgage product options are adjustable rates, including interest-only.
ST: What are the general terms for this type of loan?
JR: The down payment requirement would be 30% to 40% depending on the lender. The necessary assets they have to show must cover the down payment, closing costs as well as six months post-closing housing reserves for the subject property and any additional properties the client owns (including their primary residence).
ST: How do you perform the income analysis in this case?
JR: For self-employed borrowers, we verify the income with a letter from the client’s tax preparer or CPA. For salaried people, we will need pay stubs and potentially tax returns from their country of origin. We will also need letters of reference from financial institutions, as well as letters from utility providers (for example, mobile phone providers to confirm there are no challenges in payment history).
ST: There are probably extra requirements to compensate for the lack of US paperwork.
JR: Yes, the borrower will also need to document any additional properties they own, both inside and outside the US, and all documents must be translated into English by a certified translator.
ST: Some of our investors look for opportunities and select units that need to undergo significant renovations or capital improvements, or they go into contract and have to close fast, in 30 days or less. What would you offer them?
JR: I would suggest a Bridge Loan or Short-Term Financing. These loans are usually generally for no more than twelve months with a six-month lender option, and the down payment minimum is generally 30%. The asset requirements for this type of financing include the down payment, closing costs, and potentially three to six months of interest reserves for the subject property. It’s also important to note that in this type of loan, they must vest in an LLC only.
ST: What’s the investor upside?
JR: First of all, depending on the lender, tax returns may or may not be required. The borrower’s credit will be reviewed or analyzed but historically there’s no minimum score required. The rates are currently in the 10% to 12% area for these loans (interest-only) with two to three “points” of the loan amount as an origination fee.
ST: What is the lender looking for here?
JR: Most importantly, the lender will want to understand and agree on the exit strategy; how the loan will be paid off or refinanced into a traditional mortgage within twelve months. If the client is looking to improve the property and then sell it, most lenders are going to want to see experience in this area (fix and flip).