With so many different investment property mortgage options, how do you know which mortgage option is best for you? In our last blog, we discussed investment property mortgages and three different mortgage loan types that are available to borrowers. The three loan options we focused on were traditional conventional, hard money, and DSCR Cash Flow loans. Today, we’re going to break down the requirements. for an investment property mortgage and standards to qualify for each of these loans, to better help you make an educated decision about your future investment property mortgage.
What is a Traditional Conventional loan?
Traditional conventional loans are the most common mortgage loan type. These mortgage lenders are backed by Fannie Mae and Freddie Mac and typically have more stringent standards for qualifying. Traditional conventional loans tend to have strict requirements because non-owner-occupied mortgages are often seen as riskier mortgage loans for lenders. Because of this, traditional conventional lenders tend to have lower fixed rates and may require more upfront costs from investors compared to a primary residence mortgage.
What is a Hard Money Mortgage Loan?
Hard money mortgage loans are short-term loans with quick repayment windows. Borrowers will need to pay the entire loan back between 2 to 5 years of taking the mortgage out. These mortgages tend to have higher interest rates and down payments, as well as more upfront costs in fees because of the risk they run for lenders. Hard money investment property loans may be beneficial for borrowers looking for a quick turnaround because they offer faster closing times than traditional conventional mortgage loans. These loans are also referred to as a short-term bridge loan.
What is a DSCR Cash Flow Loan?
A DSCR Cash Flow loan is a mortgage for an investment property that qualifies borrowers based on their expected rental income. At Newfi, this means that we never look at your personal income or proof of employment to qualify you. We only need the expected monthly income of your investment property month over month. Typically, the monthly cash flow from the investment property will need to cover the mortgage obligation fully. However, because we make common sense exceptions, we can consider borrowers with a monthly cash flow less than the mortgage obligation. These loans are also referred to as business purpose or private lender loans.
What You Need for an Investment Property Loan
Down Payment for an Investment Property Loan
- Traditional Conventional: Typically, the down payment for a traditional conventional mortgage is around 20% and are dependent on your credit score, debt-to-income ratio, and investing experience. However, some traditional conventional lenders will require a slightly higher down payment on investment properties.
- Hard Money: Down payments are often higher with hard money options than traditional conventional or DSCR Cash Flow loans. Hard money loans often also come with more costs up front as well.
- DSCR Cash Flow: Your DSCR loan down payment could be as low as 20%. Additionally, we offer an option to do a cash-out refinance on one of your existing properties so that you can use your equity as the down payment on your newest investment.
Credit Score
- Traditional Conventional: A high credit score (starting at 680) is often required to qualify for traditional conventional investment property mortgages.
- Hard Money: Hard money lends have requirements that can vary from lender to lender. However, credit scores typically can be lower than traditional conventional mortgage options because these lenders often do not take credit into consideration when qualifying you.
- DSCR Cash Flow: DSCR Cash Flow loans require credit scores that are lower than traditional conventional loans. Our credit score requirements start at 640.
Loan Terms
- Traditional Conventional: Traditional conventional lenders offer standard 15-, 20-, and 30-Year fixed rate loan options. They don’t offer Interest Only or Short-Term loan options.
- Hard Money: Hard money mortgage loans only offer short-term loans. Borrowers’ repayment options are dependent on individual lender’s requirements. Hard money mortgage loans tend to have a maximum term of 5 years.
- DSCR Cash Flow: DSCR Cash Flow loans from Newfi come with multiple loan terms for borrowers to choose from. We offer standard 15- and 30-Year loan terms with fixed rates, as well as 30- and 40-Year Interest Only loan options. Interest Only loan options mean that you pay only the fixed interest on your loan for the first 10 years. After the initial 10 years, you will pay both the interest and principal, while the interest rate is fixed for the entire length of the loan.
Debt-to-Income Ratio
- Traditional Conventional: A low debt-to-income ratio is often required by traditional conventional lenders. Borrowers will be required to take on the new mortgage payment with your current income and debts, while any future income or cash flow from your investment property will not be taken into consideration.
- Hard Money: With many hard money lenders, you’ll need to have a lower debt-to-income ratio. Because DTI is determined by considering how much debt you have versus your income, hard money lenders want to ensure that you can pay the loan back within the given timeline.
- DSCR Cash Flow: With a DSCR Cash Flow loan from Newfi, we never look at your debt, employment, or personal income. We qualify borrowers based on the cash flow of their property, and therefore will not need to look at your DTI.
Interest Rates
- Traditional Conventional: The interest rate on a traditional conventional loan will be a fixed rate and will not change for the life of the loan.
- Hard Money: Hard money loans have higher interest rates than Conventional or DSCR Cash Flow loans due to the nature of the loan type. These rates will vary depending on a variety of factors, however, you will be required to pay the entire principal and interest by the due date.
- DSCR Cash Flow: DSCR Cash Flow loans offer fixed rates that do not change over the life of the loan, typically higher than a traditional conventional loan and lower than hard money loans. At Newfi, we offer both 15- and 30-Year fixed interest rate mortgages and 30- and 40-Year Interest Only mortgages. We offer 30- and 40-Year Interest Only mortgages to reduce your payment obligation for the first 10 years and maximize your cash-flow.
Real Estate Portfolio Restrictions
- Traditional Conventional: These lenders will consider your real estate portfolio when looking at your debt-to-income ratio. If you’re a more experienced investor with a variety of different investment property options—or if you plan to expand your real estate portfolio—traditional conventional loans will hinder your ability to do so in the long run.
- Hard Money: Hard money lenders may place restrictions on your investment property portfolio and consider your overall debt to income ratio within your real estate portfolio.
- DSCR Cash Flow: At Newfi, our borrowers can carry an unlimited number of properties in their real estate portfolio. We allow for both long-term and short-term (like Airbnb and VRBO properties) and will need minimal documentation on your real estate portfolio for qualifying!
Ideal Investor
- Traditional Conventional: Traditional Conventional loan options are great for first-time investors who are looking for a long-term investment property solution. Traditional conventional lenders have real estate portfolio restrictions, and therefore, carrying fewer properties is ideal for these loans.
- Hard Money: An investor who wants to fix and flip a property for a quicker turnaround would benefit from a hard money loan option.
- DSCR Cash Flow: DSCR Cash Flow loans are best suited for investors with multiple properties or looking for a simplified, unique solution. Our more experienced investors choose this loan time and time again because of the less documentation required. This solution also helps investors with documenting income on short-term investment properties.
Three Benefits of Using a DSCR Cash Flow Loan with Newfi
- Less Required Documentation
Newfi is dedicated to creating a simple and seamless loan process, which is why we’ve simplified the number of documents we need to qualify you. Our DSCR Cash Flow loan qualifies you based on the cash-flow of your investment property, which means we don’t ever look at your proof of employment or personal income.
- Borrowers Qualify on Cash-Flow
With other investment property loan options, borrowers are required to provide proof of income and employment. With a DSCR Cash Flow loan, you qualify for your investment property loan with the expected market rent of your rental property. That means we’re able to see what you can qualify for without ever needing to ask for proof of income or employment! In some cases, the rental income doesn’t even need to fully cover the mortgage obligation.
- Offering a Variety of Loan Options Might Mean More Cash Flow for You!
Many investors use Interest Only loan options to lower their monthly payments for the first 10 years. Interest Only terms allow borrowers to pay the simple interest on the loan, instead of both the principal and interest. Using the Interest Only option has the potential to lower your monthly payments on your mortgage, increasing your monthly cash flow from your property.
Which Investment Property Mortgage Option is Right for Me?
If you’ve been overwhelmed by your options, or just have questions, a Newfi Loan Advisor is available to answer any questions you may have! We offer both Traditional Conventional and DSCR Cash Flow Loans at Newfi. Get in touch with one of our Loan Advisors today at https://app.newfi.com/loancenter/dscr!!
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