When it comes to financing investment properties, lenders will want to look at various information about you & the property in order to see if they can justify making the loan. They look at the borrower’s income & employment history is often a big part of it.

This might not sound like a big deal if you have a steady paycheck from a job you’ve worked at for several years, but not everyone falls into this category. What if you own your own business or are a freelancer? What if you work for an employer, but your income is largely based on commissions/ tips?

Conventional investment property financing

If you’re buying an investment property by yourself, obtaining a conventional mortgage, can be the preferable way to go. These loans tend to have the best interest rates & repayment terms, as compared to asset-based investment property loans.

The problem with conventional financing is that it’s income-based, meaning your income must be sufficient (& consistent) enough to justify not only the mortgage payments but your other debts as well. This can be a major obstacle for investors, as your income must be enough to justify the payments on your primary home as well as the investment property.

Specific requirements depend on your situation.

Now, when it comes to inconsistent sources of income like self-employment/commission-based sales, lenders have different methods of determining your income for qualification purposes. For example, my last lender looked at a 2 year average of my self-employment income.

Asset-based lenders: a great alternative

If a conventional investment property mortgage is too difficult, or impossible, to obtain because of the nature of your income, there could be another option: asset-based investment property loans. In recent years, the number of reputable asset-based lenders has soared.

As the name implies, asset-based real estate loans are primarily based on the underlying asset, meaning the property you’re planning to buy. Typically, the borrower will still need to submit to a personal credit check, & you’ll need a substantial down payment (25% is usually expected), but otherwise the loan will be based on the property itself, not your personal income, employment, or assets.

The important number most asset-based lenders focus on is the debt service coverage ratio, or DSCR. This is the ratio of the property’s expected rental income to the expected mortgage payments (including taxes & insurance). While requirements can vary from lender to lender & may depend on your credit score, most want to see a DSCR of at least 120%, & higher is better.

To be sure, asset-based investment property loans tend to have somewhat higher interest rates than conventional loans & may have slightly less favorable repayment terms (like a prepayment penalty), but these can still be valuable tools for real estate investors.

Thank you and have a great day.

Roland Kier
CEO – America’s Best Smart Realty
Principal Broker – Georgia/Florida/Alabama Markets
roland_kier@americasbestsmartrealty.com