Conventional Loan without income?

Question

Is it possible to get a conventional loan without proof of income and good credit?

As a new investor it will be hard to show income, but I have good credit.  Rather than using private lenders or Hard Money Loan, could I get a mortgage?

I was thinking that if I put up a large enough down payment, say 30%, that would put the bank in a great equity position.  Then, if I buy and hold and show rental income to sustain the mortgage payments, would a lender see this as a low risk and lend?

Bill Gulley · Answer

Afraid you are, ability to pay is the first consideration in any loan, signature, mortgages, personal property and commercial. Only a pawn broker or payday types lend on collateral without regard to the ability of a borrower to repay.

The exemption under the SAFE Act is for owners who occupy the home, not for non-owner occupied investors/landlords. If you are selling to an individual who intends to occupy the home it certainly is not a commercial loan. A commercial loan is for the business purpose of the buyer/borrower, not the seller/lender.

If any HML type isn't concerned about your ability to pay watch out, it certainly shows or demonstrates the willingness or perhaps the intent to go after the property instead of being repaid.  :)

Andy Collins · Answer

Honestly the best way around this is to work a 'regular' job and buy a rental,,,get some experience as a landlord under your belt and have a regular paycheck.

Hard Money Lenders will want to make sure you have plenty of cash to handle the situation you described,, I buy and hold, and before I get a hard money loan they qualify me for the conforming loan to get out of the hard money

Zach Bechard · Answer

I am thinking of exit plans and options. If I get a property with a HML, do the renovations and then can't sell it for some reason, the investment strategy then turns to a buy and hold. I would be looking to refinance to get the HML or other investor out and obtain a new mortage based on the ARV and improved value.

I am just curious what other full time investors do in these situations without a paycheck to show income.

Tom Goans · Answer

Zach Bechard,

This may be a different perspective for viewing loans and the associated risk.

30 percent of what?

In recent years, many lenders discovered appraisals were nothing more than that moment’s snapshot assumption (guess). A year or two after the loan was made, a new moment’s snapshot assumption indicated the property is worth 25-50 percent less.

Now, let’s assume this is your money you are lending to a stranger. Is 30 percent equity a secured enough position if the real estate is the only source of loan collateral and security?

Bill will be better able to speak to this, but consider the return on the investment vs. risk. Even with points and other fees collected at the time the loan is made, the yield to the lender vs. risk is extremely low by some investment standards. If you stop paying, the lender forgets making any profit.

I am not defending lenders or the process. Just trying to shed more light than is typically shown.

Bill, the ball is in your court.

Bill Gulley · Answer

John, if it's a bank it's covered by FDIC or the Office of the Comptroller, without showing the ability to repay the loan as required by regulators, as the very first consideration, you won't get a loan at any LTV. As I said, a track record, two years tax records is a standard guideline, not a hard and fast rule, some lender may want to see 3 years if it looks weak. A bank or lender may lean toward a debt coverage ratio or a debt to income ratio, or both, but they may not ignore the issue of a borrower's ability to pay. :)

Jon Holdman · Answer

30% down isn't "great equity position" these days.  Its standard.  Some banks might go to 75% or 80% on an investment loan, but 70% isn't unusual.

You'll need two years landlording experience (i.e., two tax returns) to have the rental income count in loan qualification.  Once you hit that, though, the income from the new property will be included, too.

John Rooster · Answer

No.
There is a 4th option which you fail to include, small local banks. With 30% down and good credit you should be able to get a 15 year loan about about 6.5% fairly easily from a small local bank

Bill Gulley · Answer

Sorry Zach, no, all conventional loans on non-owner occupied need to show the ability to pay the loan. Some banks may count the income on the subject purchased if you have a track record, experience in rentals, but no, the down payment doesn't sway the ability to pay the debt created out of the picture. There are no more stated income loans I know of which was the problem that lead to the crash, those days are gone, pretty sure in conventional lending. :)