How do you use a Non-Qualifying Loan-NO DOC to assess and buy an investment property? An important factor before buying an investment property is to know how to properly assess the cash flow metrics. A common goal is to achieve break even or positive cash-flow monthly in addition to potential appreciation over time with a prospective property. I am a proponent of both, although some people are not as sensitive to monthly cash-flow and may choose to sacrifice the positive monthly cash-flow to get a property knowing that they may have a small carry expense per month as a result of a negative cash-flow.
Monthly cash flow is assessed as follows: Choose a property type and approximate value in an area of interest. Use Zillow, Redfin, Home Snap, etc. to find sample properties in your area by value to determine the monthly real estate taxes, hazard insurance cost, and any required HOA or condo fees. Total these mandatory monthly expenses and calculate your principal and interest on an approximate loan amount and then add them all together. This figure represents your total monthly cost of a prospective property. Now it is important to determine the marketable rent for the property. You can use the same online models to research approximate rent figures. Be sure it makes sense to you because the final rent used for purposes of the loan and property eligibility will be based on the marketable rent and not necessarily what you believe you can rent the property for to maximize income. This figure is determined by the real estate appraiser. As an example, if your total monthly payment as outlined above comes to $1800 per month and the appraiser researches the local market and determines the marketable rent is also $1800 per month then you have a 1:1 debt coverage ratio. In other words, you have a breakeven cash flow. Any marketable rent below this figure would result in a negative monthly cash-flow or above, a positive monthly cash-flow. As a side note, properties with HOA’s and condo fees make it more difficult to achieve positive cash flows whereas multi-unit properties more often than not produce very strong positive cash-flow opportunities. Lastly, just because an appraiser determines a given marketable rent, that does not mean that you cannot achieve a significantly higher figure renting the property on a platform such as Airbnb.
How do you then use the No Doc loan once you have completed the assessment and determined a target range and area for your property? The loan factors are primarily property based but a valid credit score and basic good credit are required. You have the option to buy the loan in your personal name or an LLC. There is no employment requirement. Once you meet the basic credit requirement and complete an application, a property appraisal will be ordered from a licensed appraiser. As with the assessment of the property, the underwriter will simply apply the stated marketable rent from the licensed appraiser to your total property payment calculation. The ratio of marketable rent to total housing payment will be noted. Most programs will allow down to a .75 ratio but some will go lower depending on how much money you choose to put down as a down payment. Keep in mind, to obtain the most long term investment potential, it is often best to avoid negative cash flow scenarios so the majority of the target expense ratios should be one to one or better. After your credit and property are assessed, the only remaining item for general loan eligibility will be verifying the required fund to close. This figure will be comprised of down payment, general closing costs, and any required monthly reserves.
We are happy to help you refine your property assessment and make loan program suggestions based on the property type, final cash flow analysis and your defined objective. An investor No Doc loan program is available for single family homes, condos, and multi-unit properties. The more familiar you become with the mechanics of such a program the more potential you may have to seize an opportunity when one presents itself. All of us get caught up in whether we have too many properties already and unsure if will qualify for another property. This type of a program provides the flexibility you may need.
George H. Omilan
President-CEO - NMLS# 873983
Jefferson Mortgage Group LLC - Mortgage Specialist
Programs: Traditional QM (Fannie Mae, Freddie Mac), government insured HECM Reverse Mortgages, and Non Traditional Non QM Mortgages commonly referred to as Specialized Forward Mortgages including “Alt-A Investor loans” at 80% LTV, both Full doc and No Income-No Employment (No Doc) for the investor community. Our expanded niche products also focus on the more traditional FHA & VA with Lower Score and higher Debt-to-Income Options, Fixed & Variable Jumbo loans, and Private Label Reverse mortgages for higher priced homes. We are also highly focused on specialized loans for the Self-Employed borrowers with our Bank Statement & Asset Dissipation Programs. We are committed to offering a full range of “Non-QM Loans” for expanded qualification, where the banks and large-scale lenders dare to go.