Real estate is certainly the ticket to building wealth in California but with so many high-priced areas and restrictive lending guidelines, how can a borrower qualify for a second home, much less an entire portfolio of investment properties?
To highlight the financial challenge, a median priced home in Santa Clara County is just over $1.0M. If you happen to have an extra $250,000 to put as a down payment (most lenders will require 25% down), the mortgage payment, plus property tax, plus insurance will run you about $5000 per month. This means after factoring in vacancy rates, you would need to find a tenant to rent the property for $6666 per month just to break even from a qualification standpoint. This is before accounting for any repairs or maintenance which would likely be necessary given the fact that $1.0M will only buy you a step above a 2-bedroom fixer-upper in the affluent Silicon Valley. If you don’t find a tenant, then you’ll have to be pulling in double-income C-level types of base salaries (stock options and RSU’s may not count) – leaving the rest of us in the dust…
There are, fortunately, loan programs that can allow an investor to purchase no matter how much income they earn. Like commercial loans, qualification is based on ‘debt service coverage’ on a 1:1 basis. If the appraiser’s rental survey meets or exceeds the proposed monthly debt (principal/interest, taxes and insurance), then you may need as little as 20% down, depending on the borrower’s credit score. There are options for mixed-use properties up to 6 units, as well as programs with no income ratio at all (no rental survey required). Of course, the interest on the latter program will be higher, but that may be the only option if the rental survey cannot support the monthly obligations. To ease the qualification standard, borrowers can also opt for interest-only payments for a 40-year term, which flattens out the payment over a longer term.
We also feature Fix & Flip programs – which offer terms based on experience level (number of investment properties the last 2 years) including loans and lines of credit, which offer cash-flow flexibility that traditional construction loans cannot.
While the base rate for these programs start in the high 5.0% range and will likely carry points and/or prepayment penalties, certain borrowers (think: foreign national, or LLCs), and certain properties (think: non-warrantable condos), have no other means to qualify.
In summary, using the DSC is ideal for multi-unit, mixed-use, larger down payment, or 1031 exchange transactions, and in cases where the DSC ratio isn’t satisfied, borrowers can always opt for the no-ratio program.
For more detail on the intricacies of these loans, please contact us!