What is No Income Lending?

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What is No Income Lending?

What is No Income Lending? Surely these don’t exist anymore! Yes and no. When buying a primary residence or 2nd home, the Ability-To-Repay (ATR) rule must be satisfied, and income typically must be qualified (read more about ATR here; read more about Asset Based lending here). However, when purchasing residential investment property, there are circumstances where the ATR rule is not applicable, and employment/income is not required to qualify.

There are generally 2 routes when qualifying for a No Income loan:

  1. Debt Service Coverage Ratio (DSCR): the rent covers the housing payment by a certain percentage. This can be based on the current rental agreement or by the appraiser’s opinion of market rent for comparable homes
  2. No Debt Service Coverage Ratio: rent doesn’t matter, payment doesn’t matter

Lenders will have additional requirements, including but not limited to, credit score and history, equity in the property, reserves, property type. Depending on the method of qualifying (DSCR vs No DSCR), these requirements will vary and so will the interest rates.

Generally speaking, lenders offering these programs will not have a max on currently financed properties, allow the customer to close in an LLC, offer fixed rate 30-year amortized mortgages with no balloon payment, have interest-only options, and lend on purchases, rate/term refinances, and cash-out refinances.

These loans can be a great option when:

  • Income is convoluted and difficult (or impossible) to underwrite accurately.
  • Financing needs to be secured quickly.
  • Customers want to close in an LLC.
  • Customers can’t qualify under standard lending guidelines.

 

This type of lending is not hard money. Hard money may carry 2-4 points in cost + origination fees, rates north of 10%, and/or balloon payments after 3+ years. The No Income options being discussed here are similar in cost to other Non-QM loans and do not have balloon payments or negative amortization.

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