In Episode #57, I talked to Cameron Frederickson, a loan officer with VP Lending, about several different mortgage loans for self employed people who may find it difficult to borrow using more traditional methods. Frederickson told me that, “There is a loan product out there for everybody,” and after talking with him I absolutely agree. It really is true that if you want a mortgage loan, there is a product out there that is right for you, no matter your circumstances.
What is a Bridge Loan?
The first loan that Frederickson walked me through was called a ‘Bridge Loan.’ Bridge loans are meant for people who have lived in their home for a while, established equity in it, and now want to move into a new home. For these people, it can be difficult to get a more traditional mortgage loan, as their debt-to-income ratio is rather high because of their existing mortgage, but the bridge loan has them covered.
With a bridge loan you can take equity out of your existing home -- up to 75% -- and use it as a downpayment on your new home. In addition, it is a non-contingent offer, so if you don’t wind up closing on the new home, you aren’t stuck holding the downpayment in cash and owing a bunch of interest on it. Rather, it is done altogether: the refinancing of your old property and the loan for your new property are all closed at the same time, making for a seamless transition.
There are tons of benefits of bridge loans. You don’t pay any payments on the old house for 12 months, it just accrues interest at a 6% rate while you sell it to pay off the bridge loan. (That said, there is a bloom rate at the end of 12 months, but that’s only if the house doesn’t sell.) The mortgage loan it gets you for your new home is totally standard, with no boosted interest rate, which is a huge plus. Finally, there are no early-payment fees: when your old home sells, you pay back the lender and that’s the end of the bridge loan. Best of all, bridge loans close in 30-days or less, since non-traditional mortgage lenders have an incentive to move faster since they don’t have the volume of traditional FHA lenders!
This loan is geared toward borrowers with FICO scores of 740+ and is great if you are competing against other non-contingent offers.
What is a Bank Statement Loan?
For 1099 employees, small business owners, and other self-employed people, mortgage loans can often seem out of reach: after all, it is hard to prove you have a sustainable income when you have been writing off everything you can on your taxes in order to reduce your business’ tax rate. But with a ‘Bank Statement Loan,’ mortgages for self employed people are totally viable.
Basically, with a bank statement loan, you provide the lender 1-2 years of bank statements -- either personal or for your business accounts -- and they go through them to determine exactly how much income you actually have, before any tax trickery. You can provide them with multiple accounts, or just the ones that have the most positive cashflow.
These loans are very competitive with conventional loans: with a good FICO, you’ll only have to put 10% down, and with a FICO score as low as 600 you’ll need only 20%. The par rate right now for these loans is 4.25%, which is absolutely fantastic, and you can do the standard fixed or adjustable rates at the standard 15/30/40 year periods. Plus, since these are non-standard loans, you can actually do a really interest 40-year loan where you only pay interest for the first 10 years, fixed at 4.25% and without a bloom rate. This can be great for a real estate investor who is going to sell the property within 10 years and wants to keep a high positive cashflow in the meantime.
What is a Debt Service Coverage Ratio Loan?
Finally, Frederickson told me about a really unique product called a ‘Debt Service Coverage Ratio Loan’ that is an amazing opportunity for first-time real estate investors. Essentially, for 20% down, and with proof of 6-months of reserves in the bank, you can take out a loan on any property that you plan to rent out. The only catch is, the lender sends an appraiser to ensure that the monthly rental income will be equal to or greater than the mortgage payment.
Though the rates are a little higher for a DSCR loan -- 5-7% -- this is an absolutely amazing opportunity that allows anyone with a little savings to buy their first rental property and get their career in real estate investing off the ground. Plus, for veteran investors, it is a great way to maximize your cashflow and keep buying new properties even when you have a high debt-to-income ratio because of other mortgages.
Best of all, the same 40-year package mentioned above is available, meaning you can be paying just the interest for 10 years while pulling in all that rental income for just 20% down! These loans do require a high FICO score of 760+, but for anyone that is serious about getting into real estate investing, that kind of creditworthiness should be a given.
It was really fascinating talking to Cameron Frederickson -- he was incredibly knowledgeable and taught me all about these unique loan products that are useful for people in all sorts of unique situations. If you are looking for a loan and don’t know where to start, contract Frederickson at 661-350-5872 or cameron@vplending.com. And on VP Lending’s website, https://www.vplending.com, you can find a template for prequalifications that will get you started even faster.
