A rental that carries itself: a DSCR loan
A DSCR loan is the loan for a rental whose rent covers its own payment. It is a business-purpose mortgage on a residential rental of one to four units that you do not live in, and the lender qualifies it on the property's rent, from the lease in place or from the market rent on the appraiser's rent schedule, set against the full monthly payment with taxes, insurance and any association dues, rather than on your tax returns or pay stubs. Each lender sets how far the rent has to clear the payment. Credit is still pulled, reserves after closing are required, and the loan can be made to an LLC that holds title. The rules allow it because a loan on a rental you will not occupy is credit for a business purpose under Regulation Z, outside the ability-to-repay rule that governs a loan on your own home. That is also why a DSCR loan is never the route to a home you will live in: occupancy is sworn in writing, and misstating it is mortgage fraud. It is priced like a business loan, and it can cost more than a conventional loan on the same property.
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A buyer whose own returns qualify: a conventional loan
A conventional loan is the loan for an investor whose own income and tax returns qualify for the rental, and it can cost less than a DSCR loan when it is open to you. Written to Fannie Mae and Freddie Mac guidelines, it works for an investment property of one to four units as well as for a home you live in. It is qualified on you: the payment has to fit your income alongside what you already owe, documented in a form the automated underwriting and the underwriter will both accept. The rent counts, under the agency's rules. Fannie Mae's Selling Guide treats rental income as an acceptable source of stable income when it is likely to continue, says how it is documented, from tax returns or, in the cases it lists, a lease, and limits how much of it a borrower without a history of managing rental property may use. On a rental you do not live in, the qualifying rent, after the agency's adjustments, is set against the property's full payment, and the difference is added to your income or to your debts. When the rent does not cover the payment, your own income carries the shortfall, which a DSCR loan cannot do, or you put more equity in up front so that the rent does.
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A renovation to resell: a fix-and-flip loan
A fix-and-flip loan is the loan for an investor buying a property to renovate and resell. It is a short-term, business-purpose loan that finances the purchase money and the rehab budget together: the purchase funds at closing, and the rehab money sits in a holdback and comes out in draws as each stage of the work is inspected. It is sized on the purchase price, the rehab budget and the after-repair value, which the appraiser estimates from the plans and from sales of comparable homes already renovated, and the lender sets how much of each it advances; the rest is yours to fund. It is qualified on the property and the plan more than on your income, though credit is pulled and your record on prior projects counts. It is repaid in full when the property sells, or by a refinance into a DSCR loan if you decide to keep the finished property as a rental and its rent supports one. It can cost more than a mortgage, and the cost can include points, a higher rate and a prepayment penalty, each named in the term sheet and set by the lender. A home you will live in is a consumer loan and needs a renovation loan built for an owner instead.
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Buying the next property before the current one has sold: a bridge loan
A bridge loan is the loan for buying the next property before the one you own has sold. It is a short-term loan that uses the equity in the home you already own to fund the next purchase, secured by the current property, the new one or both, and it is repaid from the proceeds when the sale closes. Until then the lender's terms set whether payments are interest-only or deferred and paid from the sale. It is sized against the equity in the property you are selling and qualified on a credible plan for that sale, and a lender may still ask for the full income file. Which kind of bridge loan it is depends on what the money is for: a bridge loan whose money buys or carries a rental is a business-purpose loan, outside the federal consumer disclosures a home loan carries, while one that buys the home you will live in is a consumer loan whatever secures it. We arrange them on the home you live in and on investment property. It can cost more than a standard mortgage, and the risk is carrying two properties if the sale is slow; thin equity, or a property that may not sell soon, makes it the wrong tool.
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A property or a timeline a bank will not take: hard money
Hard money, or private money, is the loan for an investor with a property or a timeline a bank will not take, and a clear way out. It is a short-term loan from a private lender or a fund, secured by real estate and underwritten on the property's value and the plan to repay it more than on your income: a house with no kitchen, a vacant building, raw land, or a closing a bank cannot meet. The loan is sized against the property's value, as it stands or once the plan is done, and the lender sets how much of that value it will lend. Credit is pulled and read, and the lender wants to see that you can carry the payments until the exit, a sale or a refinance into a DSCR or conventional loan. It is asset-based because a business-purpose loan on property you do not live in sits outside the federal consumer mortgage rules, and the purpose on the file has to be true. It can cost more than a bank loan, and the cost can include points at closing, a higher rate, and a prepayment penalty or a minimum amount of interest, each set by the lender. If a conventional, jumbo or DSCR loan could close in time, that is the loan to take.
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A building of more than four units: a commercial loan
A commercial real estate loan is the loan for an apartment building with more than four units, and for a mixed-use, retail, office or industrial property. It is a business-purpose loan underwritten on the property's income: the lender measures the net operating income, the rent and other income left after operating expenses, against the loan's debt service as a coverage ratio, and each lender sets its own floor. It also underwrites you as the sponsor, on your experience with property like it, your net worth and the liquidity you keep after closing. The loan can be with recourse or without, can run on a shorter term than a home mortgage and end in a balloon paid by a refinance or a sale, and can carry a prepayment penalty; each is a term in the term sheet. It sits outside the federal consumer mortgage rules, so there is no Loan Estimate and no ability-to-repay review on your behalf, and the commitment letter is one to read with your accountant or your attorney. A rental of one to four units is not a commercial loan: it can be financed with a residential loan, DSCR or conventional, even when the borrower is an investor. Commercial lending starts with a call rather than the online application.
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