What’s the difference?

Conventional Loans:

- Typically 30 year fixed rate products.

- Borrow and Title in your personal name (Entities are not allowed)

- Have a limit to the number of properties one may own/finance (usually 6 to 10)

- Full documentation (including tax returns)

- Typically one year seasoning for cash-out refi to use the new appraised value

- Have limited product structures

- Underwritten on the basis of the borrower's current ability to repay the loan without the benefit of the new rental income

Bank Loans:

- Typically 20 year amortizations

- Often 20 year terms, but sometimes balloon notes

- Usually 5/1 ARMs

- Borrow and Title in your personal name OR a business entity

- Typically do not have a limit to the number of properties one may own/finance, but generally have a limit of total $ exposure to one borrower as well as a limit for $ exposure for one type of loan

- As an example, a community bank that has been making a lot of 1-4 unit rental loans may slow that down for a bit because their portfolio is becoming too heavily weighted with one type of asset

- Full documentation (including tax returns) 

- Typically one year seasoning for cash-out refi to use the new appraised value

- Often have limited product structures and borrower may have to shop multiple banks to find the right one 

- Underwritten on the basis of the borrower's current ability to repay the loan, typically without the benefit of the new rental income

Non-QM Lenders (such as those to whom KFP Investors LLC brokers)

- Typically 30 year amortizations, fixed rate loans

- Most borrowers use fixed rate loans because there is not a pricing advantage (currently) for ARMs.

- Borrow and Title in your business entity

- Typically do not have a limit to the number of properties one may own/finance

- Typically “Light Doc” for DSCR loans

- Typically 6 months seasoning for cash-out refi to use the new appraised value

- No seasoning requirement for delayed financing

- They usually have just about any structure a borrower could want, except real-estate-secured revolving lines of credit (like a HELOC)

- Loan types include fix-and-flip, STR loans, interest only loans, etc.

- Underwritten on the basis of the subject property to repay the loan

Why work with a broker?

A financing brokerage is a company that generally has access to dozens of lenders. The broker should get to know the borrower and their specific file of the moment, understand the various guidelines of each file type and each lender, shop the best possible terms and rates for the file of the moment, and submit that file to the best possible lender. The borrower does not have to shop for rates and terms. The borrower does not have to submit the file to a lender only to be told “no” and have to start over again with a new lender (almost never). Financing brokerages usually have wholesale lenders in their network. They often also have direct lenders and hard money lenders, and they may also have banks and credit unions in their lender network.

What is “Non-QM”?

Non-QM simply means any loan that is not the typical 30 year amortized loan that is backed by FreddieMac or FannieMae. Bank portfolio loans are Non-QM by definition, though the term is rarely used this way. Non-QM is generally used for lending organizations that are non-banks and are not going to sell the loan to FreddieMac or FannieMae. These lenders usually have their own funds to lend, or

they are going to package the loans together into mortgage-backed-securities. 

What is “DSCR”?

DSCR means “Debt Service Coverage Ratio” and is the benchmark by which most Non-QM lenders evaluate loan applications. 

As an example:

- A property is valued at $300,000

- 75% LTV for cash-out = $225,000

- Rent collected is $2000 per month

- Annual taxes and insurance are each $1200, so $200 per month combined

- 30 year fixed fully amortized loan payment is $1496.78 per month

- $1496.78 (loan payment) + $200 (1/12 of taxes and 1/12 of insurance)= $1696.78

- $2000 (rent)/$1696.78 (debt) = 1.17 DSCR

- There is $1.17 in monthly income for every $1 in monthly obligation

- *Note: Ideal DSCR is 1.25 or greater. This borrower has options to achieve 1.25 or greater. She could A) raise rents, B) reduce the loan amount to reduce the payment amount, C) buy down the interest rate to reduce the payment amount, D) take an interest-only term to allow appreciation of value and rents to occur until the loan amortizes, E) raise her insurance deductible to decrease her premium.