Not all real estate investors can work with a bank, or even want to when it comes to financing an investment property. Banks move slow, require a certain debt-to-income ratio, scrutinize your tax returns, and have an overall stringent, frustrating process. That’s why non-bank lenders, like MoFin Lending, that focus on investment property financing exist.
The Problem with Rental Financing
When buying a 1-4 unit rental property, most investors are under the mistaken impression that they have limited options or frankly just do not know where to begin. This is even more true when buying a 5-10 unit multifamily rental. Some of the more well-known options are traditional mortgage lenders, like a bank, or some variation of that, like a credit union. But, there are also non-QM lenders and hard money lenders. MoFin walks an interesting line between all these categories, providing investors with an attractive financing option that will better fit the needs of long-term rental property investors.
Here’s a quick overview of the different lending options a rental property investor may have as well as some of their advantages and disadvantages:
Traditional or Non-QM mortgages benefit landlords with their long terms, low interest rates, and full amortization. However, in the US the traditional mortgage industry is hamstrung by adherence to various federal and state regulations as well as the strict and overly burdensome underwriting requirements of government-backed mortgages.
When working with a bank, most landlords must submit to an income check and have their tax returns evaluated. This is a significant hurdle for many investors since they tend to have unorthodox tax returns or do not depend on W2 income. Another downfall in working with traditional lenders is that it is difficult to foster a long-term relationship given that there is a cap on the number of properties you can finance.
Non-QM lenders provide a middle ground between traditional or conventional loan programs and hard money. A Non-QM loan is one that is not required to meet the federal government’s and Consumer Financial Protection Bureau’s (CFPB) guidelines for qualified mortgages. This basically means that the requirements to be approved are less stringent. And, while there are benefits to non-QM loans (such as no personal income check or DTI requirement, no job history required (in some cases), low credit scores), their major downfall is that the lender very much acts and operates like a bank. Because of this, the process can be just as frustrating as it is when you work with a traditional lender/bank and closing times are much longer than what they should be in the real estate investment space.
Hard Money Loans are short-term, interest-only loans that are asset-backed—the focus is more so on the real estate itself. This gives hard money lenders a lot more flexibility in the underwriting process, requiring less of you, and speeds up the time it takes to close your loan.
The terms of a hard money loan, however, are not well suited to a buy-and-hold investor. The duration of the loan is short, usually 6-24 months. The principal is due at maturity as a balloon payment. If you cannot refinance the property prior to the maturity date you would then risk having to sell the property or pay-off the existing hard money loan otherwise. The interest rates are also high—8% or even higher.
Hard money loans are much better suited for a fix-and-flip strategy or at the acquisition stage of a rental property that needs renovating. Given their shorter term, it’s not ideal to take a hard money loan for the purchase or refinance of a turnkey rental property. MoFin Lending can be considered a hard money lender since they provide short-term, interest-only bridge or hard money loans for fix and flips, rehab & hold deals, and ground-up construction projects. But, MoFin is unique in that it also provides 30-Year Rental Loans based on the property’s income and there is no personal income check or DTI requirement. They also do not have a cap on the number of loans you can have outstanding and they do lend to your LLC or corporation.
Below will explore the 30-Year Rental Loan with MoFin.
The MoFin 30-Year Rental Loan
The MoFin 30-Year Rental Loan is what a hard money loan looks like if it were designed with buy & hold or rental property investors in mind. The underwriting process requires minimal documentation and there are not many requirements to satisfy, enabling you to close quickly.
The terms are attractive and comparable to a non-QM and traditional mortgage but the process is much easier to navigate and quicker. Here are some highlights:
- Interest Rate: Starts at 4.75% for a 30 year fixed rate. That starting rate is for a lower LTV and high credit score. But, even at higher leverage ratios, the 30-year rates are competitive. Most investors qualify for a rate in the 5.25% – 6.75% range currently, on a 30-year fixed. You can get rate by submitting a loan request through MoFin’s website or over the phone and by email. They can quote you terms without pulling your credit or obtaining any sensitive information from you.
- Term: 30 years. Just like a traditional mortgage.
- Amortization: These are fully amortizing. You’ll pay the loan off over a 30 year period. Unlike hard money loans, which are interest-only, MoFin’s rental loans allow you to build equity as you pay down the principal over time.
- Property Types & Portfolios: 30-year fixed rate loans are available for single family homes, 2-4 unit properties, condos, townhomes and even 5-10 unit multifamily properties. MoFin can lend against rental portfolios consisting of 3-50 rental properties. This gives you the flexibility to pursue different deals.
- High Leverage: Purchase money loans are offered at 75%-80% of purchase price. This is directly comparable to both a traditional mortgage and a hard money loan. MoFin can also offer a cash-out refinance at 75% LTV and a rate/term refinance up to 80% LTV.
- Minimum Credit Score: 640 but exceptions can be made if your score is slightly below that and you have other compensating factors.
- No Income Verification: None at all. No income check and no tax returns required. Your personal income or debt-to-income ratio do not play a role in the MoFin 30-Year Rental Loan. MoFin underwrites to the property’s rental income. MoFin looks to see how well your gross rent covers the monthly loan payment. This is known as the debt-service coverage ratio (“DSCR”) and is discussed a bit more below.
- Process & Time to Close: The underwriting process requires much less paperwork and has less requirements than traditional or Non-QM loans. With an easier process, more communication, and the use of tech to help speed up the process, you can often close within 21-30 days.
- Entities Acceptable: MoFin can lend to your entity. If you own the property in an LLC, corporation, or partnership, that works. MoFin can also lend to you if you own the property in your individual name.
Airbnb & Short-term Rentals Qualify
Real estate investors have been consistently frustrated with mortgage lenders unwillingness to lend against short-term rentals listed on sites like Airbnb and VRBO. MoFin can lend for the purchase or refinance of an Airbnb or VRBO. The only caveat is that for a refinance of a short-term rental, it must have been operated as one for the preceding 12 months. MoFin will use the average monthly income in the last 12 months as the rent for the DSCR calculation.
For purchases, while your projected short-term rental income is helpful, it is not necessary. In this scenario, MoFin will obtain a market rent analysis through the appraiser to confirm the short-term rental’s income-producing potential on a long-term (12 month term) lease. This helps bring more comfort to lending for/against a short-term rental, since in the worst case the property can be rented on a 12-month lease if need be and it will be cash-flowing.
Portfolio Loans under a 30 Year Fixed
As mentioned above, MoFin also provides 30-year fixed rate portfolio loans for real estate investors that want to finance multiple properties at once. Some benefits to this type of loan is there is only one mortgage payment for multiple properties for you to keep track of, making accounting easier, and closing costs are lower. In addition, you will benefit from MoFin’s tech-driven process to close quickly. Portfolio loans can be an operational nightmare. Working with a lender that focuses on this type of loan will only ease the burden. With cross-collateralized portfolio financing, the minimum loan amount per property drops from $75,000 to $50,000 but a total loan amount of $300,000 must be met across the pool of properties.
No Personal Income or DTI Requirement
As an investor, typically you look declare as little income as possible, taking as much advantage of write-offs, offsets, and losses as you can. This is great for tax purposes but bad for being considered “bankable” and obtaining financing from traditional lenders. MoFin offers no-income loans and instead underwrites to the property’s income. This means that MoFin looks at the debt service coverage ratio (DSCR) as their means to an end. The DSCR basically asks the question of whether the gross monthly rent can cover the loan payment. To calculate the DSCR, you take the gross rent of the property and divide it by the loan payment (the loan payment being a breakdown of monthly principal, interest, taxes, and insurance (“PITI”)). If your DSCR is above 1.0 then there should be a path forward for a 30 Year Rental Loan. If your DSCR is below a 1.0, meaning the property does not cash-flow, an exception can potentially be made and your property may still qualify.
Build a Relationship
MoFin takes the “story” of the project into account, including the track record of the investor, their liquidity, and the fundamentals of their investment strategy. They have the leeway to give these details more weight, especially on loans where something does not fall within their guidelines and requirements. A totality of the factors can be considered to grant exceptions and make the deal happen as long as compensating factors are present. Also, MoFin does not just offer one type of loan, they provide both short- and long-term loan options. If your property or deal does not work for a rental loan, perhaps it makes sense to go the bridge route, which they can offer. Building a relationship with a lender that can lend in a variety of scenarios can only help your portfolio grow and provide you with the more resources to invest further.
MoFin’s 30-Year Rental Loan represents a financing option tailor made for rental property investors. Investors should seriously consider them if they:
- Have been declined by banks due to lack of verifiable income
- Need to close within 21-30 days
- Want to work with a lender that specializes and focuses solely on the financing of investment properties
- Want to buy or refinance a vacation rental (Airbnb or VRBO)
- Want a flexible portfolio or cross-collateralized loan
- Are looking to purchase or refinance a multifamily property of 5-10 units
- Build a relationship with a lender that can do more than just one type of loan product
It’s important to work with a lender that not only understands what the financing of your deal calls for but has the experience, expertise, and processes in place to get you to close quickly and without adding stress or complexities along the way. MoFin does just that through its 30-Year Rental Loan Program and its other investment property loan programs. You can contact them directly by visiting their website at mofinloans.com or give them a call at 866-900-6634.