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How to Avoid Hard Money – Finding the Best No-Tax-Return Investment Property Loans

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Are you a residential real estate investor? Here’s how to avoid using hard money and qualify for investment property acquisitions and refinances by using the cash flow of the investment property itself. Whereas traditional mortgage lending requires tax returns during the loan approval process, no-tax-return investment property loans do not. Providing tax returns does not always give an accurate portrayal of true cash flow, due to the way traditional loans are underwritten (which often applies a default vacancy factor, minimum global debt service, and other guidelines and overlays). For real estate investors and others whose tax returns do not accurately portray their financial picture, no-tax-return investment property loans provide a powerful financing solution. This is a great option for real estate investors that allows qualification based on simply the cash flow of the property being financed. If the rental property is cash flow positive, that will constitute sufficient qualifying income. Here’s all you need to know about how no-tax-return investment property loans work.

A. What Are No-Tax-Return Investment Property Loans?

Sometimes called “Investment property loans” or “rental loans,” no-tax-return investment property loans do not consider a borrower’s income in the traditional sense. Instead, the “income” used to qualify the loan is the cash flow of the property itself. The “cash flow” is just the monthly rental amount the property brings in. For example, a property renting for $2,000/month would be attributed a qualifying income of $2,000/month. The main requirement for these no-tax-return investment property loans is that the monthly rents cover the monthly expenses. It is that simple. Not only is a borrower’s income not considered in the loan application process, no-tax-return investment property lenders do not request income amounts, and in fact, there is no income verification of any kind. No letters from employers, no W2s, and no paystubs. Again, the income looked at is simply the cash flow of the investment property being financed.

B. Why Use No-Tax-Return Investment Property Loans?

Traditional mortgage lenders require tax returns, W-2s, and paycheck stubs in order to determine monthly income. For salaried and hourly borrowers, the lenders look at gross income for qualifying purposes. But for self-employed borrowers, traditional mortgage lenders look at net income, the adjusted gross income showing on tax returns. This puts real estate investors and other self-employed borrowers at a disadvantage. However, no-tax-return investment property loans are a great way for real estate investors to qualify for both acquisitions and refinance, without requiring bank statements or tax returns, and without developing a debt-to-income ratio. (Bank statement loans are also a great option for self-employed borrowers, to learn more about bank statement loans click here.) For borrowers that fall outside traditional underwriting guidelines but are looking for long-term loans with more attractive rates than hard money loans, no-tax-return investment property loans are a great option. These loans do not require tax returns, income or employment, or debt-to-income ratio calculations. No-tax-return investment property loans provide the flexibility and lessened documentation of hard money loans, but with rates closer to traditional financing. This is a constantly evolving area of real estate financing that offers a powerful way to grow your real estate portfolio.

C. What Does A No Tax Return Investment Property Loans Look Like?

1) DSCR – Debt Service Coverage Ratio

(a) DSCR – Defined

The Debt Service Coverage Ratio, or DSCR, is how no-tax-return investment property lenders qualify borrowers for a loan. In essence, it is a comparison of the property’s monthly rental income versus monthly expenses. DSCR provides a basis for determining the maximum loan amount an investment property can withstand. The higher the DSCR, the bigger the mortgage the property qualifies for. In terms of no-tax-return investment property loans used to finance 1-4 unit residential investment properties (non-owner occupied), the monthly rents are compared to five (5) monthly expenses of the property, namely:

  1. Principal
  2. Interest
  3. Taxes
  4. Insurance
  5. HOA Dues (if any)

Together, these are often called the “PITIA.”

(b) DSCR – Principal & Interest

The loan principal is the total loan amount, plus any costs of the mortgage that have been financed. Loans that are paid down over a set period (called “amortizing” loans) include monthly payments towards the loan principal. Loans also often have an interest-only option meaning that each month payments are made towards interest only, and no portion of the principal loan balance is paid down over the life of the loan. Instead, a balloon payment in the amount of the principal loan balance is due at the end of the loan term for interest-only loans. For loans that do amortize (i.e., are paid down during the life of the loan), a mortgage calculator can be used to determine the monthly principal and interest payments, based on given loan size, interest rate, and amortization term.

(c) DSCR – Taxes, Insurance, & HOA Dues

The next portion of the debt component of the DSCR calculation consists of taxes, insurance, and HOA dues. These are fairly self-explanatory. Calculate the monthly taxes and insurance for a refinance (or estimated monthly taxes and insurance quote for purchase) and add in any HOA dues present. The total of monthly taxes, insurance, and HOA dues (if any), along with principal and interest payments, make up all debts included in the no-tax-return investment property loan DSCR equation. It’s that simple!

(d) DSCR – Example

For example, assume an investment property is rented for $2,000/month. Assume also the property has the following monthly expenses. Principal & Interest 

  • $1,000/mo Property Taxes
  • $250/mo Insurance
  • $120/mo HOA Dues
  • $130/mo TOTAL PITIA

$1,500/mo In this example, the DSCR = $2,000 Monthly Rent / $1,500 Monthly PITIA = 1.33. No-tax-return investment property lenders generally want to see DSCR above 1.00, and sometimes offer better pricing if the DSCR is above 1.25-1.50.

2) Purchase v. Refinance

No-tax-return investment property loans can be used for both purchases and refinances. For a purchase, they provide a great way to qualify for a purchase loan without tax returns, income or employment, or historical bank statements. For refinances, in addition to all these benefits, no-tax-return investment loans can be used to tap into a property’s equity and “cash out” the property. For example, if the equity in a property increases, a real estate investor can obtain a no-tax-return investment property loan that provides cash in hand to be used for any business purpose.

3) Down Payment, Rates & Costs

No-tax-return investment property loans are long-term solutions, generally with terms of 30 years. Like traditional mortgages, they can be fixed or adjustable. The minimum down payment on a no-tax-return investment property loan is usually 20% (or minimum of 20% equity for a refinance), some lenders require up to 25% or more depending on credit, DSCR, and other factors including a reserve requirement. Larger down payments do often allow for a better rate. Gift funds from close relatives are usually allowed to be applied towards the down payment, and sometimes also for payment reserves. Rates for no-tax-return investment property loans are generally higher than traditional loans (based on increased perceived risk to lenders), but all other typical loan fees are similar, such as origination points, broker and lender fees, appraisals, title, and escrow, etc.

4) Personal Credit

Although personal income and debts are not considered for no-tax-return investment property loans, personal credit is considered in the loan approval process. However, this requirement is typically no more onerous than what is required of a hard money loan. Lenders want to see that a real estate investor is generally able to pay their bills in a timely fashion. In addition, having more than 1 or 2 mortgage late payments in the previous year can often require a loan approval exception, which can sometimes delay or impede the process.

E. Finding the Best No-Tax-Return Investment Property Loan

Many no-tax-return investment property lenders do not have a retail channel, meaning they will only fund loans using a broker. The best brokers spend many hours scouring thousands of loan programs to find the best rate and terms for their clients. It is in the broker’s best interest to find the lowest rate and most favorable terms available in order to close the deal. If you are a real estate investor and considering purchasing or refinancing a property, no-tax-return investment property loans are a great way to avoid hard money. To see how this program can work for you, click here to speak with a loan broker and get a quote.

D. Advantages & Disadvantages

1) Pros of No-Tax-Return Investment Property Loans

  • No tax returns required
  • No employment or income required
  • Personal or business income not considered
  • No debt-to-income (DTI) ratio developed or considered
  • Allows real estate investors and self-employed individuals to qualify when they otherwise cannot

2) Cons of No-Tax-Return Investment Property Loans

  • Larger down payment than traditional loans
  • Rates are slightly higher than traditional loans (but not much more)
  • Some (but not all) lenders require landlord experience
  • Personal credit still plays a role

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F. Bottom Line

No-tax-return investment property loans are a great way to avoid hard money with a viable long-term financing solution for real estate investors. The lessened documentation and underwriting requirements are similar to hard money loans, while rates and fees are more akin to traditional loans.

Whereas traditional mortgage lending requires tax returns during the loan approval process, no-tax-return investment property loans do not. With these loans, real estate investors are able to purchase or refinance a property with no employment required, no personal income considered, and no debt-to-income ratio developed.

The only cash flow that matters is the rents of the property being financed. That’s it. If the monthly rents sufficiently cover the monthly expenses—principal, interest, taxes, insurances, and HOA dues (PITIA)—i.e., if the property DSCRs (debt services), the property will qualify.

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