If you’re a mortgage broker, some of your clients may have asked you about investment property loans. And while many experienced residential brokers shy away from investment property loans, they often miss out on an excellent business opportunity.
Most mortgage brokers are familiar with home mortgage loans, including the necessary credit score requirements, debt-to-income (DTI) ratio calculations, mortgage insurance premiums, minimum downpayment, the income verification process and all of the documents required to qualify buyers for owner-occupied residential properties.
Government-Sponsored Enterprises (GSEs) like Fannie Mae and Freddie Mac, which purchase and guarantee the home mortgages originated by lenders, establish the underwriting and documentation guidelines to reduce their risk. Most owner-occupied home loans fall under the underwriting guidelines used by the GSEs. When you concentrate on residential mortgage lending, the rigorous requirements of GSE loans become all too familiar so it can be challenging to explore other mortgage industry options.
Investment property loans include non-owner occupied residential 1-4 properties (single family residences, townhomes, and condominiums), multi-family (apartment) buildings, mixed-use buildings, and commercial properties used for “business” purposes. Stated simply, if a borrower purchases a property with the intention of earning a return on the investment, either through rent collected from tenants, the future resale of the property or to operate a business entity, it qualifies as an investment property.
Most banks, wholesale, conduit, hard money and non-bank specialty finance lenders provide loans for investment and small balance commercial properties to some degree.
Many banks, wholesale and conduit lenders originate and sell their loans to GSEs. They typically offer the lowest rates but must follow the strict underwriting guidelines established by GSEs, most notably, detailed documentation of the borrower’s income and credit history. GSEs also limit their investment property loans to residential 1-4 and multi-family buildings.
Some banks use customer deposits to fund investment property loans. While they offer the lowest rates for investment properties and small balance commercial real estate, banks must limit lending for commercial properties to conform to the lending concentration limits imposed on banks by the Federal Reserve. Banks accomplish this through selective lending that limits their loans to existing customers with an excellent credit rating and deposits at the bank.
Hard money lenders acquire capital from private investors, often professionals like doctors and attorneys, to fund local investment properties and small balance commercial loans. These loans are typically short-term solutions that range from 6 to 18 months with high-interest rates and lower LTVs.
A non-bank portfolio lender, often referred to as a specialty finance company, retains, manages and services the loans it originates in a private mortgage portfolio. It acquires investment capital from private investors, which may include insurance companies, pension plans, and private money managers, by offering bonds which pay a risk-adjusted return from the interest and loan serving fees it collects. The rates charged by non-bank portfolio lenders typically fall between low rates charged by banks and the high rates charged for short-term loans from hard money lenders.
If your borrower is self-employed or owns a small business, they may find it difficult to qualify for a GSE-sponsored investment property loan.
For example, a small business may not have an established credit history, making them ineligible for a multi-family building loan from a GSE or bank. Likewise, self-employed real estate investors and small business owners often write off expenses associated with their investments and business operations to reduce their income and tax liability. Unfortunately, these practices, although legal, can also make your borrowers ineligible for investment property loans from GSEs or Banks.
So the simple solution to getting an investment property loan for tough-to-qualify investors is to use a portfolio lender that doesn’t sell their loans to a GSE or bank.
Since direct portfolio lenders don’t sell their loans to a GSE, they are free to create their own underwriting rules, which often include an asset-based approach for investment property loans. As its name implies, asset-based loans place more importance on the value of the property and its revenue-generating potential than the borrower’s personal income. Because of this, borrowers often don’t need to provide documentation to verify their personal income.
Calling an asset-based loan a “no income” or “stated income” loan is often a misnomer. The underwriting for an asset-based loan does evaluate the income or revenue-generating potential of the property, so calling them a no income or stated income loan isn’t technically correct. Income from the property isn’t personal, but it is still income, and lenders typically verify it during the underwriting process.
If you service self-employed real estate investors and small business owners who have difficulty verifying their personal income or don’t have an established credit history, using an asset-based lender is the best option for obtaining the financing your borrowers need to acquire an investment property.
The best way to deal with your tough-to-qualify investors is to offer an asset-based loan as a medium-term solution that allows them to acquire the property and take advantage of an excellent investment opportunity. You can then provide a plan to help your borrower establish a plan so they can qualify for a conventional loan after a few years. Doing so will earn you the reputation of a broker who knows how to solve business challenges through the creative use of asset-based lending programs.