How Future Rent Determines Qualification and the Importance of 1.1%
No-income loans for investment property purchases can create financing options for many borrowers. While the traditional methods of income documentation from bank statements and paystubs will work for most borrowers, some need a different way to qualify.
Self-employed and commission-based borrowers, as well as people with assets tied up in non-liquid investments, will often benefit from this program. To qualify, the lending agent will use one of two methods; which method they use will depend on the future rent compared to the total payment.
And it all comes down to one crucial number: 1.1%.
1.1%: The Essential Number Used to Determine Income to Qualify
Market Survey for Rent
Before you can know how your income to qualify will be determined, you need to perform a market survey, which will provide an estimate on how much money your new property will earn on a monthly basis.
Determining the market value and future rent of an investment property is similar to the appraisal process of a commercial property, which considers many economic factors. One of the most important, of course, is the ability of the property to generate income.
The market survey will look at many different variable that help estimate earning potential. They will look at similar properties in the area; properties that have comparable rooms, square footage, amenities, and features. If the property has been rented in the past, and the professional can gain access to that information, they will use it in the survey, although it will not be treated as the final number.
Drawing the Line: 1.1%
As you can see, there are many factors involved in estimating the future rent that will come from the property, but when the final calculations are made, there is really only one number that matters: 1.1%.
How the qualifying income is figured will depend on whether or not the estimated rent covers at least 1.1% of the total payments. If it meets 1.1% or more, then the qualification will be processed in one way; if it does not cover 1.1%, it will be factored another way.
Basically, for every $100,000 in total payments, you will need $1,100 in rental income.
Let’s look at a simplified example of how this might work:
Scenario 1: $350,000 Total Payment, $4,000 in Rent
- Let’s say you are using the no-income investment-property loan to purchase a multiunit property that will result in $350,000 for the total payment. After completing the market analysis, the professional determines that you will be able to generate $4,000 in monthly rental payments on the property. Because $4,000 is 1.14% of $350,000, the qualification will use method A, which is described below. (“Method A” is not an official term but merely phrase we are using for this discussion.)
- Result: Method A
Scenario 2: $350,000 Total Payment, $3,000 in Rent
- Now let’s say to have the same total payment on the loan, but because of various factors, such as market conditions of property location, the professional determines that you can only bring $3,000 in monthly rent. $3,000 is only 0.86% of $350,000, which means that the income will need to be qualified using Method B.
- Result: Method B
Once you know the monthly rent and can compare that you the total payment, you are able to determine how your qualification will be processed.
Method A: Monthly Rent is at Least 1.1% of the Total Payment
The first way to qualify, and generally the most desirable, is when the monthly rent is 1.1% of the total payment. In this case, you will be able to qualify using the future rent as part of your income. Let’s revisit Scenario 1 from above to clarify. In this case, we determined that the property would bring $4,000 in monthly rent, which was above 1.1% of the total payment. This means that the $4,000 can be your income to qualify, and no income documentation will be required, assuming other requirements are met.
This is an extremely beneficial method, as all of your other debts can be ignored. Essentially, you can qualify even if you have a large debt load from other investment properties, which may disqualify you with other programs.
Using this method, you can get financing up to 80% of the purchase price (80% LTV) for a loan up to $1 million. If you are able to bring a 30% downpayment (70% LTV), then you can get financing up to $2 million, which significantly increases your opportunities for purchasing income-generating properties.
Method B: Rental Income is Less Than 1.1% of the Total Payment
While most investors will prefer to use the first method, method B is certainly an attractive option for people who want to purchase an investment property. In this case, there are still no requirements for income documentation, which opens loans for many different investors. However, the loan will come with a slightly higher interest rate than the previous method.
Note on Interest Rates: This higher interest rate (which is usually marginal), is simply factored into the loan to reduce the financial risk to the lender. Basically, because the rental income is lower, there is a statistically higher chance of financial default; to cover this risk, a higher interest rate is used on the loan.
With this loan, you can still get financing for a large purchase, but you will need to bring a larger downpayment. For financing up to $1 million, you will need a downpayment of 25% (75% LTV), which is only 5% more than the first method. If you want financing for an investment property between $1 million and $2 million, you will need a 35% downpayment (65% LTV).
Either one of these methods allow you to purchase an investment property that can bring substantial income. They offer a convenient way to access the financing you need for an investment purchase, and may be the solution for saving your purchase when other financing options fail.
Learn More About No-Income Investment Loans
If you want to learn more about the advantages of using a no-income loan for your investment purchase, contact the knowledgeable staff at San Diego Purchase Loans today.