SS210: The Truth About No Income Verification Mortgages

SS210: The Truth About No Income Verification Mortgages

The allure of no-income verification mortgages is solely based on the ability to be approved for a mortgage without traditional proof of income. However, this comes with some additional requirements. In this episode, Charles discusses some aspects of non-income verification mortgages that are not commonly discussed.

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Talking Points:

  • When I discuss No-Income Verification Mortgages, I am referring to DSCR Loans for investors. DSCR loans are not NINJA loans, a major cause of the Global Financial Crisis— NINJA stands for No-Income, No-Jobs, No-Asset loans.
    • DSCR Loans, also known as Debt Service Coverage Ratio loans, are a type of financing commonly used in commercial real estate lending where the loan underwriting is based on the income generated by the asset instead of the borrower’s personal income.
    • Check out episode SS197 to learn more about No-Income Verification Mortgages (DSCR Loans). The debt service coverage ratio is an easily calculated financial measurement of a property’s ability to service its debt. You divide the Annual Net Operating Income by the Total Annual Debt Service amount. For example, if a property you want to purchase generates $100,000 per year in net operating income and the debt service obligation (principal and interest payments) is $80,000 yearly, the DSCR is 1.25x. The higher, the better. A DSCR of 1 means the property will break even, a DSCR over 1 means the property will generate cash flow for the owners after the debt is paid, and a DSCR under 1 means the property will lose money. Most lenders will want a DSCR of 1.2 or higher.
  • When investors compare different real estate financing options, many will feel drawn to DSCR loans because these loans typically close faster and require less paperwork. However, the main benefit is that lenders do not verify the investor’s income or require a certain income for approval. However, there are 3 main drawbacks that many investors more focused on a quick close with less paperwork might not immediately notice.
    • 1. Higher Down Payments. A local bank might require a down payment of 20%-25%, while a DSCR lender might require a down payment of 25%-35%.
    • 2. Higher Interest Rates. It is common for DSCR loans to have an interest rate anywhere between 1%-2% higher than conventional loans.
    • 3. Higher DSCR. Most DSCR lenders will require a DSCR of at least 1.25x for multifamily, 1.25x for industrial, 1.4x for self-storage, and 1.5x for assisted living. In other words, investors need to find great cash-flowing deals and/or put down larger down payments to lower the loan-to-value and increase the debt service coverage ratio.
  • These loans have other drawbacks, like possible loan limits, prepayment penalties, and cash reserves. Still, many local banks have loan limits, cash reserve requirements, and prepayment penalties, so I didn’t include them since you will most likely be subject to them either way.
  • These loans are mainly focused on investors purchasing income-generating properties looking for a more streamlined underwriting and approval process that doesn’t include income verification. Investors with solid tax returns who are not in a rush may find a traditional bank loan less expensive and a better fit for their situation.

Transcript:

Charles:
Did you know some investors qualify for big loans without showing a paycheck or that you could close on a profitable property without ever proving your income? I spent weeks diving into the pros and cons of no income verification mortgages, uncovering details that could make or break your next investment. Welcome to Strategy Saturday. I’m Charles Carillo, and today we’re discussing one of the hottest topics in real estate financing. No income verification mortgages, also known as DSCR loans. So it sounds simple, right? But there’s much more to it. How can investors qualify for a mortgage without showing personal income? Is it really a safe option? And why do these loans often come with higher down payments and interest rates? And more importantly, are they the right choice for you? So when I discuss no income verification mortgages, I’m referring to DSCR loans for investors and DSCR loans are not Ninja loans a major cause of the global financial crisis.

Charles:
And Ninja stands for no income, no jobs, no asset loans, DSCR loans, also known as debt service Coverage ratio Loans are a type of financing commonly used in commercial real estate lending where the loan underwriting is based on the income generated by the asset instead of the borrower’s personal income. Now check out episode SS 1 97. That’s episode SS 1 97. To learn more about no income verification mortgages, DSCR loans, the debt service coverage ratio is easily calculated financial measurement of a property’s ability to service its debt. So you simply divide the annual net operating income by the total annual debt service amount. So for example, if a property one purchase generates $100,000 per year in a net operating income and the debt service obligation, so what you’re paying the bank, the principal and interest payments is 80,000 a year. The DSCR is 1.25 x, meaning that you can pay the debt service and you still have $20,000 left over.

Charles:
The higher the better. A-D-S-C-R of one means the property will break even. And A DSR over one means the property will generate cashflow for the owners after the debt is paid. And the DSCR under one means the property will lose money. Most lenders will want A-D-S-C-R of 1.2 or higher. When investors compare these different real estate financing options, many will feel drawn to DSCR loans because these loans typically close faster and require less paperwork. However, the main benefit is that lenders do not verify the investor’s income or require a CERT income for approval. However, there are three main drawbacks that many investors more focused on, a quick close with less paperwork might not immediately notice. So number one is higher down payments. So a local bank might require a down payment of 20% to 25% while A-D-S-C-R lender might require a down payment of 25 to 35%.

Charles:
Number two is higher interest rates. It is common for SCR loans to have an interest rate anywhere between 1% to 2% higher than conventional loans. And number three is higher DSCR loans. Most DSCR lenders will require A-D-S-C-R of at least 1.25 x for multifamily, 1.25 x for industrial, 1.4 x for self storage, 1.5 x for assisted living. In other words, investors need to find great cash flowing deals and or put down large down payments to lower the loan to value and increase the debt service coverage ratio, which makes it safer for the lender. Now these loans have other drawbacks like possible loan limits, prepayment penalties, and cash reserves. Still, many local banks have loan limits, cash reserve requirements, and prepayment penalties. So I didn’t include them since you will most likely be subject to them either way, however you take your financing. And these loans are mainly focused on investors purchasing income producing properties, looking for a more streamlined underwriting and approval process That doesn’t include income verification.

Charles:
Investors with sell tax returns who are not in a rush may find a traditional bank loan less expensive and a better fit for their situation. So I hope you enjoyed. Please remember to rate, review, subscribe, somebody come to potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.

Charles:
If you always want to invest in real estate but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding, and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties in great locations that provide us with consistent passive income while we wait for appreciation in the future and take advantage of tax laws while we’re waiting. And unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out and invest with harborside.com. If you like the idea of investing in real estate. If you like the idea of passive income, partner with us at investwithharborside.com. That’s investwithharborside.com.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax, legal, real estate, financial, or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of syndication Superstars, LLC exclusively.

Links Mentioned In The Episode:

  • SS197: No Income Verification Mortgages (DSCR Loans)

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