Disclaimer: This article is meant for educational purposes only and is not intended to be construed as financial, tax, or legal advice. Pahlisch Homes always encourages you to reach out to an advisor regarding your own situation.

Last year, we published our “Home Loans 101” blog, which served as an introduction to the world of mortgages. In that post, we covered everything from interest rates and common loan types to how to navigate the pre-qualification process. Hopefully, this was a helpful resource for first-time home buyers or anyone looking for a refresher on how home loans work.

Today, we’re graduating to “Home Loans 201” and diving into more advanced topics like investment property loans and non-qualified mortgage (non-QM) loans. And just like last time, we partnered with our friends at Hixon Lending — our preferred lender — to gather all the information you need to know about these complex financing options.

Whether you’re an investor looking to purchase a rental property or a more mature buyer with significant assets, this article is for you! Below, we’ll discuss common investment property loans and programs, as well as non-QM loans that offer flexibility for sophisticated buyers.

Investment Property Loans and Purchasing Strategies

Investing in rental properties can often involve specialized loans or nuanced purchasing strategies. Here are some creative ways to secure a rental property and ensure it benefits you financially.

Debt Service Coverage Ratio (DSCR) Loan

A DSCR loan, also known as an Investor Cash Flow loan, is a non-qualified mortgage (non-QM) loan perfect for real estate investors who want to avoid using tax returns or personal financial statements to qualify. Instead, your ability to repay is assessed based on your rental home’s income flow. This type of loan can be especially helpful if your income sources are complex or variable.

To qualify for a DSCR loan, you must have a healthy DSCR ratio, which is calculated using the following formula:

DSCR = Monthly Rental Income / PITA (Principal, Interest, Taxes, Insurance, and Association Dues)

In addition to the DSCR ratio, investment property buyers may also have to meet certain credit score requirements or offer a down payment, but these requirements vary between lenders.

Proposed Rents for Qualifying

If you’re an investor buying a property with anticipated rental income, some lenders may allow you to use proposed rental income to help qualify for your home loan. Here’s an example with some simple math:

Let’s say the monthly mortgage payment for your rental property is going to be $2,000. If your anticipated rental income is also $2,000, the underwriter will count 75 percent (or $1,500) toward offsetting your mortgage, reducing your debt-to-income ratio impact. Why 75 percent? Because the underwriter is subtracting 25 percent for vacancy losses and maintenance expenses.

Surprisingly, qualifying for an investment home is often easier than qualifying for your primary residence. This makes proposed rents a great strategy for building a portfolio without relying on your personal income for qualification.

Financing Investment Properties for Family Members

Have a kid who’s in college or early adulthood? Buying a property and renting to them is a great strategy for investing in real estate. One popular approach involves including your child as the primary borrower and then having you cosign the loan. Your child can then live in the home as the owner-occupied resident for a few years, and when they graduate or are ready to move on, you can sell the home or keep it as a rental property.

This financing strategy can be a smart way to get better terms on your loan. Loan documents only require a person to live in a home for twelve months to call it a primary residence. As long as you abide by that guideline, you can benefit from owner-occupied financing, which can include lower down payments and favorable interest rates compared to investor loans.

One tip if you’re considering this option: start working with your child now to help them build good credit. Here are some ways you can build your child’s credit score.

Multi-Unit Investment Properties

There are two primary strategies investors can use to purchase a duplex or other multi-unit property. One is the full rental option, where you can purchase a duplex, rent out both units, and use this rental income to support your mortgage qualification.

The other option is the primary residence approach. Because you only need to live in one of the units for twelve months to call it a primary residence, you can occupy one unit and rent the other, allowing you to benefit from favorable owner-occupied financing terms. Then, rental income from the other unit can be used to partially offset your mortgage payments.

To learn more about purchasing a duplex, we recommend checking out this article from LendingTree.

Non-Qualified Mortgage (Non-QM) Loans for Mature Buyers

If you’re a high-net-worth individual, retiree, or self-employed buyer without traditional income documentation, non-qualified mortgage (non-QM) loans can offer the flexibility you need. Whether through asset-based loans or reverse mortgages that enhance retirement cash flow, these loans allow you to qualify based on assets rather than employment or income statements.

Here are three non-QM loans that might be right for you. 

Asset Depletion Loan

An asset depletion loan uses your liquid assets, such as savings, investments, or retirement accounts, and considers them in place of a traditional annual income. With this type of loan, your monthly “income” is calculated by dividing your total liquid assets by 360 months (the typical duration of most mortgage loans), allowing retirees or self-employed buyers to qualify without employment income.

To qualify for an asset depletion loan, you must be of retirement age (59.5 years old) and make monthly distributions from your retirement or investment accounts.

Asset Qualification Loan

An asset qualification loan is very similar to an asset depletion loan, with one key difference: it does not require monthly distributions from your retirement account. This makes asset qualification loans a flexible choice for high-net-worth individuals who might not want to draw on their assets regularly.

Reverse Mortgage

Finally, there’s the reverse mortgage. If you’re familiar with this type of loan, you may have heard it can be a risky choice. But like many other loan programs, it can be a great option as long as it fits your specific needs.

A reverse mortgage is a financial product that allows senior homeowners aged 62 or older to purchase a new home based on the equity in their current home. This can be a great way to free up cash flow in the retirement years since no mortgage payments are required. And there’s no risk of foreclosure, as the loan is not subject to repossession by the lender.

How do you know if a reverse mortgage is right for you? First, you must be 62 or older, live in the property as your primary residence, and have significant equity in your current home. You must also have enough funds to pay for ongoing property expenses like taxes, insurance, repairs, and HOA fees. You’ll also need to participate in a counseling session to ensure you understand the details of the reverse mortgage and that it’s the right solution for you.

Another thing to note is that upon death, whoever inherits your estate will have one year to sell the property and repay the loan. Any remaining equity will be given to whoever inherits the home.

Ultimately, reverse mortgages can really benefit retirees, especially those on fixed incomes. By using your current home’s equity to eliminate monthly mortgage payments on your new home, you can enhance your cash flow and ease financial pressures.

But it’s also crucial that you fully understand the details of a reverse mortgage before obtaining one. For more information, please contact Hixon Mortgage to see if a reverse mortgage is right for you.

Explore Options for Purchasing Your Next Home

We hope this overview of some of the most common investment property loans and non-QM loans has given you a clearer picture of what financing option might be right for you. But if you still have questions and want to talk to an expert, we highly recommend reaching out to Hixon Mortgage to discuss next steps for getting qualified for a home loan under one of these programs.

Also, if you’re ready to buy your next home, we’re running a promotion you don’t want to miss! Right now, any borrower who buys a Pahlisch home financed by Hixon Mortgage will receive $5,000 to use toward closing costs or prepaids. Visit our Preferred Lenders page to learn more. You can also call us at 541-644-4247 to speak with a New Home Specialist and find the right Pahlisch home for you.