Building a portfolio of investment real estate properties can be a great way to diversify your overall financial picture. With real estate, investors can take advantage of passive income as well as building equity with the potential for a long term payout. But financing an investment property isn’t always simple, especially for investors who don’t have traditional income. That’s where the Investor Cash Flow Loan can really help.
What is an Investor Cash Flow Loan?
The Investor Cash Flow Loan is a non-qualified (Non-QM) mortgage that allows the borrower to qualify for the loan based on the cash flow from the subject property. In other words, if you’re buying a rental home that generates cash flow, you can use that as income on your application. If the home in question isn’t occupied by a renter but you plan to list it for rent after closing, you can use the money you expect to make from the rent to qualify. This can be helpful for borrowers who don’t have traditional employment arrangements or consistent income.
What are the Qualifications?
The Investor Cash Flow Loan uses a debt service coverage ratio (DSCR) on the subject property to determine borrower eligibility.
The DSCR is calculated by dividing the gross rents by qualifying principal, interest, taxes and association fees (PITIA). The ratio must be greater than or equal to 1 in order to qualify.
For example, let’s say you are interested in financing the purchase of a rental home that already has an occupant and they are paying $1500/month in rent. That equates to $18,000/year. Now, let’s say the principal, interest, taxes and association fees for the mortgage on that property come to $950/month, or $11,400/year. To find the DSCR, the lender would divide $18,000 by $11,400. This comes to 1.57, which is greater than 1 and would qualify.
When DSCR Equals 1. Is it Still Worth Investing?
By contrast, let’s say you are interested in financing a home that is not currently occupied by a renter, but you anticipate being able to rent it at the current market price of $1,000/month, which would bring your rental income to $12,000/year. The mortgage PITIA costs come to $12,000/year as well. $12,000 divided by $12,000 equals 1, which means you would qualify for the loan; however, you would not make a profit from collecting rent the first year. Your tenant is basically paying the mortgage for you while you build up your equity over time–which isn’t a bad thing. You would just have to anticipate raising the rent or lowering your PITIA costs in the future in order to earn additional income from the property.
Benefits of the Investor Cash Flow Loan
Choosing the Investor Cash Flow Loan program to purchase investment property can help burgeoning real estate investors build out their portfolios without having to provide detailed income or employment documentation. Likewise, the program is pretty lenient when it comes to credit scores. The FICO minimum for the Investor Cash Flow Mortgage is 580.
Another benefit to this program is that there’s no limit to the number of financed properties the borrower has. If you already have mortgages on three, four, or 20 other properties, you may still qualify for the Investor Cash Flow Loan.
Last but not least, the Investor Cash Flow Mortgage offers loan amounts up to $3,000,000. Luxury home investors can opt for this program as an alternative to jumbo loan financing, which often have added income and/or employment documentation requirements.
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