Stated income loans used to be very common before the housing crisis. They were a big part of why the housing crisis occurred, but many people wonder if they are still available. When you buy your first rentals properties, getting a loan is not difficult. Most big banks will be happy to finance an investment property for those with less than four mortgages in their name. However, if you have more than four mortgages, have switched jobs recently, have a high debt-to-income ratio, or have less than stellar credit, it can be very tough to finance a rental. The big banks like Chase, Wells Fargo, Bank of American, and many more will tell you that getting a loan is impossible. However, there are many other lenders and banks that will finance investment properties when you do not meet the big banks’ guidelines. Local portfolio lenders (banks that lend their own money and do not sell their loans on the secondary market) often have much more flexible programs for investors. There are also hard-money lenders who specialize in financing fix and flips or rental properties for a short period of time. Finally, there are national lenders who specialize in financing rental properties. These lenders have fewer restrictions on credit score, debt to income ratios, and income verification. These loans are not as easy to obtain as stated income loans from the past, but it is much easier to finance investment properties with these lenders than with a big bank. The lenders care about how well the rental property performs and the loan to value ratio. These national lenders also offer 30-year fixed-rate loans or adjustable rate mortgages with no balloon payments. Some even have very short or no seasoning periods for cash-out refinances.
What is a stated income loan?
A stated income loan is one where the lender does not verify how much money a borrower makes. I actually received a stated income loan on the first property I bought in 2002. I told the lender how much money I made as a real estate agent, and that was good enough for them. There were obviously some problems with stated income loans. Borrowers could lie about how much money they made, which would allow them to qualify for a loan they could not afford.
After the housing crisis, the government enacted many new lending regulations. Banks also enacted tougher guidelines for their own, and stated income loans disappeared. Even though there are ways to buy houses with little money down, lending guidelines are much tougher than they were before the housing crisis, especially for investors.
How has it become tougher for real estate investors to get loans on investment properties?
Before the housing crisis, there were plenty of lenders who would give loans to investors with only 5 percent down and no verified income. Things changed drastically, and investors are now required to put at least 20 percent down. Plus, almost all banks and lenders will verify income. It can be very difficult for some investors to get loans because their debt-to-income ratio is too high. Debt-to-income ratio is a borrower’s monthly debt payments compared to their monthly income. One big problem for investors is many lenders will only count part of rent payments as income, and you may not be able to count rent as income for more than a year!
Many real estate investors also take huge deductions on their taxes. Being able to depreciate the structure on a rental property is a huge advantage to owning rentals, but it also decreases your taxable income. If your taxable income is too low, it can be very tough to qualify for a loan. Full-time real estate investors have problems qualifying as well because they do not show enough taxable income. Banks also want borrowers to have at least two years of work experience. If a real estate investor has recently changed careers or quit their job, it can be almost impossible to get a loan.
Even if a real estate investor owns properties free and clear, it can be tough to refinance a property for any amount. Most lenders want to see verified income, good credit, good debt-to-income ratios, and 2 years of job history to lend money.
What options do real estate investors have to get a loan when they cannot verify income for two years?
While most banks will not lend to investors who do not have stellar financials, there are some who will. Local portfolio lenders are one option for investors. I have financed all of my rental properties through a local bank who finances properties with their own money. Most banks will sell their mortgages to the secondary market, but many local banks do not. Because local banks may not sell their mortgages, they have more lenient guidelines on how they lend money. They may not offer stated income loans, but they are much more flexible than big banks:
- Many local lenders will not require two years of verified income
- Many local lenders will have flexibility on how they count rent towards income
- Many local lenders will not have a limit on how many mortgages a borrower can have (most big banks only allow four)
- Many local lenders will have shorter seasoning periods for cash out refinances
There are also national lenders who specialize in lending to landlords. Multiple companies were started in the last five years to help real estate investors finance their rental properties. The nice thing about rental-property lenders is they often care more about the financials of the property than they do the financials of the investor. Rental-property lenders want to finance houses that have great cash flow, and they worry less about debt to income ratios. The lenders will still want to see income taxes, credit scores, and other financial data from the investor, but they will have much more flexible lending guidelines than the big banks. Some of the national rental property lenders do not even care about debt-to-income ratios. While these lenders may not offer true stated income loans, they offer loans that are much closer than the big banks.
To learn how to get awesome deals on rentals, how to finance them, how to manage them, and how to retire early check out: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely.
How can you find a national rental property lender?
There are many companies that advertise they lend to real estate investors. I have done a lot of research on different companies because I was thinking of refinancing many of my properties through one. I was able to get a pretty good idea of which companies I liked and which I did not. I had a horrible experience with Jordan Capital and would warn everyone to steer clear of them. I ended up paying for 7 appraisals, and they were not able to come close to the terms or rates they quoted me because they lost their funding source. They would not help at all with the cost of the appraisals even though it was their fault the lending fell through. On top of that, they did not order standard appraisals, which meant no other lender would use them. I ended up refinancing most of those properties through my local lender.
There are other lenders who have done a much better job for investors I know. They are easy to communicate with and offer decent rates and terms.
What other advantages do alternative lenders have over big banks?
Not only can local portfolio lenders and national rental-property lenders offer loans to investors who may not qualify with big banks, there are other advantages. My local lender does not care if my houses are under my name or an LLC. National rental-property lenders will require properties be under an LLC. Big banks will want loans to be in the investor’s personal name, which can be a problem when investors are trying to limit liability. I have all of my properties under their own LLC, which could be tough with a big bank. You can buy a property in your personal name, and transfer it to an LLC later when you finance with a big bank, but the bank can call the note due. Big banks will have a clause in their loans that says they can call a loan due when the property is sold. When you transfer a property from your personal name to an LLC, you are selling it. While it is rare that a loan will be called due, it is possible.
Financing investment properties is much harder than it used to be. Stated income loans were great for many responsible investor, but caused a lot of problems when investors and lenders stretched the truth to get a deal done. Stated income loans are very rare in today’s market, but with portfolio lenders and rental property lenders it is much easier for investors to get loans.