New construction NINA and “projected-income” financing help
Hi everyone. Posted once before and have since visited an investment meetup and have structured my plan a bit better but need further help still.
I own my own business as an architectural designer and have designed and built houses with various GCs over the years. I am not a GC myself but with my experience I will be doing a lot of the work on this project myself which will keep costs low.
My credit score is 832 and I have no debt. I own the land outright (valued at $100-$150k) and the projected value of the house after being built is expected to be upwards of $800k. I have decided to use this property as a rental income, as it seems like a good exit strategy if I can use the rentals projected income to qualify. The rentals in the area are set around $6-$12k/month depending.
Here’s my issue: I was told previously by a loan officer that in order to secure funds for this project, I needed to sell my existing home. So I did. That turned out to be severely misguided advice as I was then told that because I sold the property, which was an income property and made up half of my income, I no longer qualified for the loan! They told me,” we can’t use your previously noted income because the rental property no longer exists therefore the income doesn’t exist.” I don’t want to make anymore mistakes like this and believe this means that I now need a no doc approach.
I found information on lendingtree as follows:
“NO INCOME, NO ASSET
Available only for investment properties, current no-income, no-asset (NINA) loans are approved based on projected rental income for the property being purchased. Typically, as long as the rent covers the new mortgage payment, no income or asset documentation is necessary.
Who they’re best for:
Real estate investors with enough cash for high down payments may be able to quickly build a portfolio of investment properties with this type of loan”
This sounds like what I’m looking for but I’m wondering what the caveat here is? I don’t want to rely on calling another lender who may lead me down the wrong path again, so I wanted to ask an audience of people for their thoughts.
If this isn’t viable please do let me know, along with any ideas you might have, and I’ll get back to the drawing board and visit some more meetup groups to continue learning about the financial aspects of this journey.
Not willing to give up on this project yet. Thank you for your time!
The loan type that you are referring to is a DSCR loan. It stands for Debt Service Coverage Ratio. Basically it means that underwriting is comparing the rents versus the PITI mortgage payment. So long as the rents are 75% to 120% of the PITI mortgage payment, that is the only debt ratio that is looked at. No income or employment is put on the loan application. The LTV is determined by your credit score and what the ratio is on the rents versus the PITI payment.
This loan is not a construction loan, this is only for existing properties. If you need construction financing, you will need to do a hard money / private money loan. These loans are equity based loans. So the fact that you own the property outright, and you will do some of the work yourself at a discount from what a GC would charge should give you sufficient equity ion to the deal. They will base their max loan amount off of the ARV After Repair Value. Typically a ground up will require a max LTV of 70-75% of the ARV. You expect an $800,000 value, so that would be a max. loan of $560,000 to $600,000. Also, most hard money lenders that do ground up construction, don't like to fund horizontal improvements. They want a loan that has the horizontals in place, such as the water, power, septic or sewer connection and permits in place. So you may have to come out of pocket for those items to then get funding to go vertical.
Once the home is complete, you can then refinance out to a DSCR loan for long term financing, 30 years. Once you have enough income coming in from your rentals, then you can get conventional financing, but you will need that income to show up on tax returns, so it could be a couple of years that you would be in the DSCR loan before you can get into a conventional loan.
All said and done, this is your path way.
I hope this helps.
@Kevin Romines
super helpful response. I can finally see a pathway to pulling this off now
just making sure I understand completely before I begin calling around for funding:
1. Because of the value of the property when completed, I should be good to go with obtaining funding that isn’t based on my current income. I’ll have to pay the lender every month, usually based on the construction funding draw amount. May have to fund utilities myself, but this is a developed area so there are utility lines around my plot
I should call real estate investors and hard money lenders to shop around and pick one that’s right for me
2. once the home is completed, I need to pay off the investor/lender as agreed. Here, I will take out a dscr mortgage that again, isn’t based on my current income, but the projected rental income of the property. I will have this loan for at least 2 years as I continue to rent out the property and show a rental income trail on my tax docs
3. after two years I can use the tax docs with income flow to take out a conventional mortgage on the property
is there anything I’m missing or things to be aware of? does anyone here have recommendations for a lender or investor licensed in Arizona?
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I also have a slightly unrelated question about the DSCR loans, what's the catch with them? They sound like a really easy way to build a rental portfolio for someone who has construction experience.
With a DSCR, I'd be able to find a cheap property i could enhance with my own funds and skills to make profitable, and a DSCR would allow me to do that solely based on what I will make once it's rented?
I wish I knew about all of this stuff before I sold my lat property! But hopefully on to better days from here on out.
