Whenever you ask someone to finance investment properties, most lenders ask to look at some information about you and the real estate to check if they can justify giving you the loan. They will also look at the borrower’s income and employment history before giving you the green flag. It might not sound like a huge deal if you have a job where you’ve worked for several years and a steady paycheck. But not everyone will fall into this category. What if you are a business owner or a freelancer? Or what if you are working for an employer, but your income is based on tips or commissions?
Today, our team from Real Estate Funding Solutions will discuss what implications these issues might have. Especially, when you try to obtain conventional financing for investment real estate. Along with the primary alternatives you need to consider.
Conventional Financing for Real Estate Investment
If you plan on investing in a real estate property all by yourself (as opposed to investing with partners). Obtaining a conventional loan can be the best way for you to go. Such loans often have the best rate of interest and repayment terms compared to asset-based investment loans. However, the main issue with conventional loans is that it is income-based. If you are self-employed, own a business, or work for a commission-based company, chances are your overall income is not as consistent as an average 9-to-5 employee.
It means that if you wish to apply for a conventional loan, you need to have consistent and sufficient income that justifies not just your mortgage payments. But also all other debts you may have. It is often a critical obstacle for new-age investors, as their pay should be enough to justify the costs of the investment property as well as on your private home.
Specific requirements for a loan will depend on your unique situation. For instance, if you plan on purchasing a duplex property, you would have to pay a total of 25% of the down payment. And have a debt-to-income ratio of less than 45% if you have a credit score of 680 or higher. When it comes to inconsistent income like commission-based sales or self-employment, lenders have different ways to determine if your current income qualifies for the loan process.
For instance, your lender might want to take a look at the two-year average of your self-employment income. As long as you have a long track record of an income that can easily justify your loan, it will be easy for you to acquire conventional financing for an investment property.
Asset-Based Lenders: An Alternative You Can Consider
If a conventional loan seems to be too difficult, or next to impossible, to obtain a loan since you don’t have consistent income, you still have one more option at your disposal: asset-based investment real estate loans. Asset-based money lenders are a perfect solution for any new-age investor hoping to finance investment properties.
Nowadays, the total number of reputable asset-based lenders has soared significantly. As the name suggests, all asset-based real estate loans are based on the underlying assets (the property you are planning on purchasing). Ideally, a borrower will have to submit a personal credit check along with a substantial down payment of 25%. Nevertheless, remember that the loan itself would be based on the property you plan on buying, not your personal employment, income, or assets.
DSCR: debt service coverage ratio
The debt service coverage ratio, or DSCR, is an essential factor most asset-based lenders often consider before giving a loan. It is the expected rental income ratio to the regular loan payment on the property (including insurance and taxes). While requirements may vary based on your lender or credit score, most lenders will like to see a DSCR of at least 120%, with higher preferable. To be sure, all asset-based loans used to finance investment properties tend to have a slightly higher rate of interest and may have less favorable repayment terms (like imposing a prepayment penalty). However, they can still be a valuable tool for all real estate investors.Asset-Based Lenders: An Alternative You Can Consider
Make sure you contact a professional before you make such crucial decisions. Since professionals have extensive knowledge and on-field experience, they can effortlessly help you make the best decision. They will also inform you of other ways to secure a loan for your next real estate investment. Remember that valuable insight by a professional expert can help you make the most of your investment.
Contact Real Estate Funding Solutions For Professional Help Today!
Are you planning on investing in real estate but don’t know where or how to finance an investment property? Connect with a Real Estate Funding Solutions expert right away! Our professionals have been in the business for years and have enough information to help you get maximum return on your investment. Moreover, our team will help you throughout the entire process, from filing forms to closing. Call us at +1 855-913-8637 to speak with our professionals.