As THE experts in the area, we have a lot of experience and connections in helping our clients find the best funding, with the most advantageous lending requirements, for their purchase.
Financing residential rental property, one that you won't be living in (non-owner occupied), and commercial property, which might be used as a business or office location, is quiet different than getting funding for a home you will be living in (owner occupied). Lenders have very different lending criteria for each of those buyer purchases. Buyers, who buy a multi-family unit, and chose to live in one of the units, typically have choices within both owner occupied and non-owner occupied lending packages.
Lending approvals when buying a rental property you will live in: Owner Occupied Property
When purchasing owner occupied properties, only the buyer has to qualify for the loan. this loan will be a typically residential loan from a lender. It may be FHA loan, Freddie Mac loan, Conventional, etc. The lender will help you select the best product for you to purchase your home with. Since the real estate crash of 2010, lenders now assess buyers financial readiness at two levels- credit score and debt to income ratio. Here the credit scores is typically used by the lender to set the "interest rate" on the loan. The lower the score, the higher the risk of not getting paid, the higher the rate. The higher the score, the lower the risk of getting paid, and the lower the interest rate. Now the lender will have limits, high and low on interest rates, and if your credit score it too low, you may not get the loan.
The second level of approval comes from an analysis of your debt to income ratio. Very simply put, it is the amount of monthly recurring debt you pay out divided by the monthly income you have coming in. So money out divided by money in. Recurring debt are things that would show up in a credit report or reported in a courthouse. Credit card debt is typically reported as the minimum monthly payment allowed- not what you actually pay. If this ratio falls between 38% - 41%, you will probably qualify for the loan on this criterion. Remember, it's like playing golf- the lower the number the better
Lending approvals when buying rental property you won't live in: Non-Owner Occupied Property
This is done at two levels- with the first goal is to qualify the buyer- looking at credit score and debt to income ratios, and the second is to qualify the property, using the lenders required debt service coverage ratio for the type of property you are looking to buy. As in residential properties, investors credit score is assessed to land in a rage of interest rates. Their debt to income ratio scores are handled a bit differently. Here the bank will calculate for an investors debt to income ratio as it is today, and then, calculate at "global" debt to income ratio by adding the new properties income and expenses into the investors current debt to income ratio. Ratios of 38% - 41% are still ideal. Please note that the more positive cash flow properties you bring into your portfolio, your debt service coverage ratio will continue to drop- with the lower the number, the more the bank will typically encourage you to borrow. And this is how the bank looks at you, but, for income producing properties, the bank will also look to the property and qualify it also.
To qualify the property, almost all lender will look at the properties debt service coverage ratio. It's like the debt to income ratio for the person, only this number is based solely on the most recent income and expenses of the property. the lender calculates the property's ratio by diving the income of the property by its expenses. Here the bank is typically looking for a debt service coverage ratio at a 1.2 minimum. Think of this this way, for ever $1 you pay out, you must bring in $1.20. If the ratio was 2.5, that would mean for every $1 you pay out, you are bringing in $2.50. Just hold the $1 as a constant as you think about this. If the property is a typical residential property, with family living, and it meets the 1.2 ratio, the property will probably qualify for the loan.
It should also be noted that banks have different minimal debt to service coverage ratios for different types of properties you might buy- and all of them are based on risk. The higher the risk of damage, the more money the property will need to generate to make the repairs. For example, a college dorm, may have a 1.5 DSCR, while a motel or small hotel 1.35, etc.The lender will let you know what those factors are.
It should also be noted that, as an investors, buying a property you won't be living in, there are lending options out there that allow you to purchase properties, that are four units down to single family residences, in your own personal name. You will be restricted in this type of lending as the limit for such lending is 10 units or less. If you want to buyer more like that, you will have to move properties from your personal name probably into an LLC or other entity- which will cause this to look like a sale to another party- with all the associated costs and achieving lending for the LLC. Residential lending under these guidelines typically require 10% to 25% buyer down payments. It also places the liability when things happen, directly in the owner lap which might expose all their personal holding in the event of a lawsuit.
If you are buying properties your are not going to live in, properties that are over four units (unlimited size), or buying the property through an LLC, then the funding will be a commercial loan- and the type of loan most investors seek out, as it has a 20 year life-cycle, the interest rate is typically withing 1% of residential funding, typically requires 20% down (no matter how many units in the building), and the LLC provides a protective wall in the event of a lawsuit between the LLC and the personal holdings of the owner. In the end, there are a lot of advantages buying through your LLC and using commercial loans- especially if you are looking to build a substantive real estate portfolio into the future.
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