All Forum Posts by: Herndon Davis

For those who are capped and constrained by all of the Conventional Fannie Mae/Freddie Mac rules on investment real estate lending, you should give the Non-QM (Non-Qualified Mortgage) world a try. I've detailed below both the advantages and disadvantages of Non-QM loans/lenders. Please let me know if you have any questions, I'd be happy to follow-up! 

WHAT ARE NON-QM (NON-QUALIFIED MORTGAGE Lenders/Loans?

Non-QM (non-Qualified Mortgage) lenders are non-bank depository lenders. They are corporations that are NOT regulated by traditional Fannie Mae/Freddie Mac guidelines. They are focused on business real estate investors whose needs have outgrown the Conventional lending market. In the Non-QM world, we do NOT calculate personal DTI (Debt Ratio) or look at personal taxes, or even look at personal income. You can be unemployed with no W-2 income and not filed taxes and still qualify for a Non-QM loan!!

Why???

Non-QM lenders are asset based while Conventional lenders are credit based.

Non-QM lenders focused solely on the following criteria when green lighting your deal:

1-The ability of the property to cash-flow in terms of covering its underlining debt; or its ability ti appraise with ARV that covers the debt if you are flipping.

2-The credit of the borrower (660 or higher, preferably above 700)

3- Your liquidity (do you have 3-6 months of liquid assets) after you close on the property.

That's it!!

8 ADVANTAGES of NON-QM Loans/Lenders
1-Can make loans to legal entities (i.e. LLC, Corp etc.), Family Trusts etc.
2-Can consolidate various mortgages into ONE portfolio loan
3- No mortgage Insurance
4-Will loan on BOTH Commercial Residential (5+ units) and Commercial Business (retail, office, warehouse etc)
5-Loan Amounts range from $45K minimum (residential) to maximum $5M (Commercial).
6-Do NOT need a job, income to apply.
7-No limit on the number of mortgages you can have
8-In some instances can cross collateralize property

4 DISADVANTAGES of NON-QM Loans/Lenders
1- 20% down payment
2-Typically 2 pts lender fees or more
3- Slightly higher interest rate if your credit is below 700 or the the property DSCR (debt service coverage ratio) is below 1.3.
4- Show 3-6 months liquidity left over after you close on the property

It does NOT matter how many conventional mortgages you have. In the Non-QM world, we do NOT calculate personal DTI (Debt Ratio) or look at personal taxes, or look at personal income. The only metrics we focus on is the ability of the property to cash-flow to cover its underlining debt; the credit of the borrower and in some cases your liquidity (do you have 3-6 months of liquid assets) after you close on the property. That's it!! Now you should be aware that Non-QM loans are more expensive (i.e. 20% down payment, Up to 2 pts lender fees, and slightly higher interest rate if your credit is below 700 or the the property DSCR (debt service coverage ratio) is below 1.3.

ADVANTAGES of NON-QM
1-Can make loans to legal entities, family trusts etc.
2-Can consolidate various mortgages into ONE portfolio loan
3-Do NOT need a job, income to apply.
4-Non limit on the number of mortgages you can have
5-In some instances can cross collateralize property

It's probably best to get a more expensive Non-QM (non-Qualified Mortgage) loan that allows you the flexibility to a LOT more including this scenario. At some point you grow out of the Conventional Lending space.

YES business credit is used all the time to qualify for down payment and repair work on rental real estate all the time. It is not reported on personal credit and is a GREAT alternative resource for down payment.  You pay the minimum balance and pay it off over time.

Don't be afraid to go into lower quality neighborhoods. Screen your tenants carefully.  They need to place to stay too.  Think factory worker, customer service worker, teacher and laborers.  All hard working people who aren't' paid a lot of money. I would screen out part-timers, enforce 3X on rent which a working class couple should be able handle, no felonies whether violent or not, evictions, etc.

Your COC will be higher, be okay with no appreciation but have major equity in lower priced home with higher down payment amount

YES you do NOT need to work or show personal income to qualify for a mortgage,for investment property IF you use a Non-QM (non-Qualified Mortgage) Lender.  Your wife will need to have strong credit (minimum 660 but preferably above 700 for better interest rate) and a property that cash flows.  That's it!  

20% is the norm for Non-QM Lenders and 15-20% for Conventional Lenders.  I'm not sure where you've looked but the majority of lenders will operate on this basis.  All the big banks too.  

@Eric Ippolito if you're going to invest out-of-state you need to open your locations up as well.  Texas is home to Dallas, Houston, Austin and San Antonio, 4 cities that happened part of the top 10 largest metro areas in the country.  But still you may want to search farther than the Lone Star state.

I would also encourage you to go deeper into the South and Midwest.  Tennessee, Alabama, Mississippi, Louisiana, Missouri, Indiana, Kansas, etc.  The only drawback is that if you do not have a connection to these cities it makes it much harder to manage. You need a trusted team and you also need to have personal knowledge of these markets.  It's soooooo easy to be taken advantage of. Folks think you're wealthy if they see you're an out-of-state investor and will throw high priced, unprofitable deals your way.  Or charge higher for repairs or management fees etc.

Good Luck!!

Starting off try 2-4 units. Small enough to handle but still giving you a degree of economies of scale. A vacancy can still be covered by other units and you could even house hack if needed to reduce your other household expenses to free up income to pay for unexpected repairs and such.  You live in an expensive are of the country so the investment may be great even for a 2-4.  If that is an hurdle for you then start of with a small single family and grow from there.  OR invest out-of-state but only if you've lived there and have a trusted team to manage the property.

MAJOR RED Flag!! If she has section 8 voucher, the landlord can elect to have the tenant to pay utilities + THEIR share of the rent or he/she can receive a subsidy for utilities which still may not cover all expenses especially if the tenant is a high consumer.  Or she may feel that her voucher covers more than it actually does.  

You may want to remind her that in the  market rent world without section 8 vouchers, the tenant pays full rent, everything except water, trash/garbage, sewer.  But if you're renting an entire single unit home, the tenant pays for almost everything including lawn care, water, etc but typically not garbage/trash, sewer