All Forum Posts by: Brad Roche

Agreed, thank you for commenting the additional info - Some of our clients already have one FHA loan that was their primary. So the next property would be conventional unless they sold/refinanced out of that FHA. Traditionally, it would have been 15% for them but this 5% has opened doors without the need of getting out of the current FHA. That first FHA primary mortgage they have may be in the 3% interest rate range. Don't want to touch that one! Only one FHA per person, primary residence.

Starting today- Fannie Mae has updated their down payment requirements for 2-4 Unit properties when you live in one unit. To buy a multi units property- the down payment requirements use to be:

2 Units:

• 15% Down

3-4 Units:

• 25% Down

With the new Updates- the minimum down payment for 1-4 Units is 5% Down!

This update is a game changer for people looking to house hack a multi-family property. It has opened the door for buyers who are well qualified but did not have the 15-25% to put as a down payment. They have just made it even easier to be a homeowner and landlord as once!

What is a no-ratio loan? Much like a DSCR loan for an investment property- a no ratio loan does not look at your Debt-to-income ratio (DTI). They are mainly focused on your credit score and cash reserves. This is a great loan option for non-traditional buyers who write off a lot of their income as a loss (i.e. Self-employed / Business Owners). As far as qualifying income when applying for a traditional mortgage- we can only use income that you pay taxes on.

Here are the requirements for our No-Ratio program- they may differ lender to lender but this can be used as a good base of knowledge to understand how a No-Ratio Loan works. Please talk to your lender about their No-Ratio requirements:

• Occupancy Types:
  • Primary Residence
  • Second Homes
• Eligible Property Types:
  • SFR, PUD, Townhouses, Condo's, Multi-Units, Modular, Rural, and Log Homes
• Credit Score Minimum/Cash Reserve Requirements/Down Payment Requirements
  • 720+ / 24 Months Cash Reserves (PITIA*) / 20% Down
  • 680-719 / 18 Months Cash Reserves (PITIA*) / 25% Down
  • 660-679 / 12 Months Cash Reserves (PITIA*) / 35% Down

* PITIA is your monthly mortgage payment (Principle, Interest, Property Taxes, Home Insurance, and Association Fees

If Comparing No-Ratio and Conventional- you would go for Conventional 10/10 times if you can qualify. For No-Ratio Loans- the terms are not ideal but are a great alternative option for non-traditional borrowers and those who can not qualify Fannie Mae/Freddie Mac Loans.

 Thank you for the Comment and great point Derek!

House Hacking is a great way to become a homeowner and landlord at once! Not to mention- it is a lot cheaper way to buy an investment property rather than putting 20% Down. Which loan do you use…. Conventional or FHA? Read below how the two government loans compare:

Minimum Down Payment Requirements and Credit Scores:

- Conventional: 620 Min.

•         - First-Time Homebuyer: 3%
•         - Repeat Homebuyer: 5%
•         -Multi-Units (2-4 Units): 5%

• - FHA: 500 Min.
•     -First-Time / Repeat Buyers / Multi-Units (2-4 Units)
  • • -3.5% Down = 580+ Credit Score
    • -10% Down = 500-579 Credit Score
    • -0% Down = 600+ Credit Score (1 and 2 units only)

Debt-to-Income Ratio Maximum:

• -Conventional: 45%
• -FHA: 57%

** These are the maximum's set by FHFA- each lender could have additional requirements or have a lower DTI maximum.

Using Projected Rental Income to Qualify:

• Conventional:
  • - Single-Family Residence: You are allowed to rent out individual rooms to help pay the monthly mortgage but at this time- you can not use that towards qualifying
  • 2-4 Units: You are able to use 75% of the projected rental income towards qualifying. (The 25% accounts for vacancies)
• FHA
  • - Single-Family Residence: Same as Conventional; you can rent out the additional rooms but can not use that towards qualifying for the mortgage
  • - 2-4 Units: Same as Conventional; you can use 75% of the projected rental income towards qualifying.

Monthly Mortgage Insurance:

• Conventional (PMI): The Private Mortgage Insurance is required on the loan for anything below 20% Down. Once- you have reached 20% equity in the house- the Monthly Private Mortgage Insurance will automatically fall off.
  • The rate of the PMI is based on your credit score and down payment.
• FHA(MIP): The Mortgage Insurance Premium is on the loan for the life of the loan so it will not be removed. You would have to refinance to a conventional loan to have the Mortgage insurance be dropped.
  • The rate of the MIP is set at .55%

Upfront Premiums/Fees:

• Conventional: None
• FHA: Has the Up Front Mortgage Insurance Premium (UFMIP) and is 1.75% of the base loan amount. It is generally rolled onto the back of the Loan

In all- Conventional and FHA are both great for househacking but it depends on your personal situation which one would be best for you. Talk with your lender on how the two loan options compare for your specific situation.

***Disclaimer**** These are the guidelines set by the FHFA. Each lender may have additional overlays and regulations on top of these. Talk to your lender to find out with overlays.

 Hey Ty- Thank you for the comment!

Yessir- our DSCR investor recently added the projected short-term rental income...Great point! Definitely helps out with the DSCR Ratio. Really hoping (and wouldn't be surprised) that Fannie/Freddie start allowing projected short term rental income to qualify in the near future.

When it comes to securing financing for an investment property, Conventional loans and DSCR (Debt Service Coverage Ratio) loans emerge as two top choices. Conventional loans are the standard go-to option for investment financing, but how do DSCR Loans measure up? The DSCR ratio is = Gross Monthly Rent / Monthly Mortgage Payment. In simple terms- I like to think of DSCR as... Does your monthly rent "cover" your monthly mortgage (debt)- Check out below to see how conventional and DSCR loans stack up against each other!

Credit Requirements

• DSCR
  • - 620 Minimum Credit Score
• Conventional
  • - 620 Minimum Credit Score
    

Down Payment Requirements

• DSCR **Under $1 Million Loan Amount
  • - DSCR Ratio > = 1.0
    • - 700+ Credit Score = 20% Down
    •  - 620-699 Credit Score = 25% Down
  • - DSCR Ratio = .99 - .75
  •         - 700+ Credit Score = 25% Down
    •   - 660-699 Credit Score = 30% Down
• Conventional 
  • - 620+ Credit Score = 20% Down
    

Income Requirements      

        DSCR

        -  Does not look at Income whatsoever

• Conventional
•    - Debt-to-Income Ratio must be 45% and below

Using Rental Income to Qualify

• DSCR
  • - DSCR loans account heavily for the DSCR Ratio (= Projected Rent / Gross Monthly Mortgage Payment)
  •             -We look for the ratio to be 1.0 + to receive the best rates and term (a.k.a we look for the monthly rent to completely cover the mortgage payment or more)
  • - If the DSCR ratio is between .75-.99 (a.k.a the rent does not fully cover the mortgage payment)- you are still eligible for DSCR but expect to receive a higher rate and worse terms compared to having a ratio 1.0+
    
    •         - Example: Borrower’s monthly mortgage payment will be $2,000. After the appraisal was complete- the appraiser said the projected rental income is $2,200. DSCR Ratio = 2,200 / 2,000 = 1.1
      • - If the projected rent came back at $1,800 (= 1,800 / 2,000 = .9) You would still be eligible for DSCR but you will receive worse rate and terms.

      Conventional

        - You can use 75% of the projected rental income toward qualifying for the mortgage

Prepayment Penalty

• DSCR
  • - Most will be anywhere from No Prepayment Penalty to 5 Years.
    • - The higher the prepayment penalty…the better rate / terms you will receive
    •     - Penalty is generally 5% of the loan amount if you pre-pay
• Conventional
  • - No Prepayment Penalty

Who is an Ideal Borrower?

• DSCR
  • - Self-Employed, Business owners, Real Estate Investors ( if you write off a lot of your income as expenses)
• Conventional
  • - W2, 1099 (Who don't write off their income), salary, hourly workers.

Overall: If you meet the qualifications, a Conventional loan is the most favorable choice. It offers the most attractive rates and terms for investment property loans. On the other hand, DSCR loans come with higher interest rates and fees, but they serve as a viable alternative if you don't meet the requirements for a Conventional loan.

Welcome to BP Joel!

Great decision to start investing in the Charlotte area! With the higher rates- Long-Term Rentals are a little tougher to cash flow in this market but the Charlotte area appreciation is some of the best in the country! 

Id recommend looking into the Middle-Term Rental Market for Traveling Nurses, people moving to the area looking for a place to live between houses, remote workers. A lot of them are still cash flowing with the higher rates! Relatively newer type of rental in the Charlotte area.

I'm over in the Davidson area- would love to connect if you have anymore questions on investing or on the lending side

Hey Justin- Welcome to BP!

House Hacking is definitely going to be your cheapest way to buy your first investment property. Fannie Mae just recently announced they will be decreasing the minimum down payment for 2-4 unit properties from 15-25% down to just 5% down! Huge came changer. If you are able to find a multi-unit property- you are also able to use the future projected rental income towards qualifying for the current mortgage- as well as for future mortgages. 

If you buy a one unit property and rent out each room... it will of course help with paying for the mortgage monthly payment but you will not be able to use that income towards qualifying. Just something to keep in mind-

I'm over in Davidson, NC so glad to connect if you have any more questions on investing or on the lending side of things.

In a high-interest rate environment, every penny counts when it comes to managing your finances. One area where this is particularly true is in paying down your mortgage. For most people, their mortgage is their largest monthly expense, and the interest rates can significantly impact the overall cost of homeownership. This article explores the benefits of making additional principal payments on your mortgage, using a $250,000 loan at 7.5% interest for 30 years as an example. By paying an extra $200 per month towards principal, you can effectively reduce your interest rate to 6.39%, resulting in substantial long-term savings.

Understanding Mortgage Basics

Before delving into the advantages of paying extra towards your mortgage, it's crucial to grasp the fundamentals. In a fixed principal and interest mortgage, such as the one mentioned, your monthly payment remains the same throughout the loan term. However, the allocation between interest and principal changes over time. In the early years, a significant portion of your payment goes towards interest, while in later years, more goes towards principal.

THE BENEFIT OF PAYING EXTRA PRINCIPAL

Interest Savings:

In a high-interest rate environment like the 7.5% scenario we're considering, a substantial amount of your monthly payment goes towards interest. For instance, with a $250,000 loan, your monthly payment would be approximately $1,748 initially. In the first month, roughly $1,562 goes towards interest, and only about $186 reduces the principal balance.

Shortened Loan Term:

When you make extra principal payments, you're effectively reducing the outstanding balance of your mortgage. Over time, this results in a shorter loan term. In our example, adding an extra $200 per month would enable you to pay off your 30-year mortgage in approximately 22 years and 6 months. This not only saves you on interest but also means you'll own your home outright much sooner.

Long-Term Savings:

The long-term savings from making extra principal payments can be astounding. By reducing your effective interest rate and shortening your loan term, you can potentially save tens of thousands of dollars in interest payments. In our example, over the life of the loan, the savings could amount to over $90,000!

In a high-interest rate environment, managing your finances wisely is essential. One way to maximize your savings and reduce the overall cost of homeownership is by making extra principal payments on your mortgage. By doing so, you can significantly lower your effective interest rate, shorten your loan term, and save a substantial amount of money in interest payments. So, if you find yourself in a high-interest rate scenario, consider the benefits of paying a little extra towards your mortgage each month; the financial rewards will be well worth it in the long run.

The APR describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate. The APR allows a borrower to compare costs of credit because it factors in term, interest rate and fees associated with the loan. The above use is for sample purposes only and should be reviewed with your loan originator for specifics to your mortgage.

*Rates effective Sept 26, 2023. Rates quoted are estimates and based on a 740 credit score. Loan-to-Value’s (LTV) of 80% for Conventional Loans, 100% for VA Loans, and 96.5% for FHA Loans. This payment does include taxes and homeowner’s insurance is an estimate; your actual payment will be higher. An annual and monthly mortgage insurance premium may be required and will vary depending on the loan characterization. Payments and rates may vary based on borrower’s credit score, actual closing costs and other variables. Depending on your situation, flood, property hazard, and mortgage insurance may be needed, which could increase the monthly payment and Annual Percentage Rate (APR).

USDA - * This loan amount does not include the upfront guarantee fee, your loan amount will be higher. 100% financing, no down payment is required. The loan amount may not exceed 100% of the appraised value. Loan is limited to the appraised value without the pool, if applicable.