The Background
Sam Nguyen is a client that took advantage of the benefits of a ICF loan in 2022 to purchase an investment property. Sam decided to use the DSCR program due to the ease of the entire process.
First: A Quick Review
ICF is an abbreviation for Investor Cash Flow mortgage. Some lenders also refer to it as an DSCR loan (Debt Service Coverage Ratio). To break the benefit of the loan down to its most common denominator – the property itself is used to qualify for income.
The borrower does not need to qualify income. Since the client’s income is not used to qualify, this eliminates mountains of documents and paperwork. Any self-employed client or any real estate investor who has ever completed a standard conforming mortgage will tell you about the endless paperwork required.
On a standard conforming mortgage, underwriters will ask for a minimum of two years personal returns (with all schedules included), and two years of business returns (including 1099’s, 1165’s, and any other applicable schedules). In addition, they will ask for current lease agreements, year-to-date Profit and Loss Statement (for self-employed), and a letter from your CPA among other items.
Providing this documentation to underwriting is just step one. Once the underwriter receives all the required documents they will go through each page with a fine tooth comb. Often they will require additional documents and/or written explanations from your CPA.
Sam Nguyen Wanted To Avoid All This Documentation
“Like most people, I am a busy man,” says Sam. “Although I am still in the early stages of building my real estate portfolio, I have been through the financing process before. In my previous experience, the mortgage did eventually close but after many delays and endless headaches” states Sam.
“Try calling your CPA repeatedly for one more piece of documentation or one more signed explanation letter. It is bad enough to make these requests during a CPA’s slow season, but approaching tax season. Or worse during tax season – forget it.” says a frustrated Sam.
“Luckily, I have a great CPA and she has decided to stick with me long-term. However, there was a minute when I thought I would be searching for a new CPA at the end of the standard mortgage process. Not a fun position to be in.” laughs Sam.
Sam’s Story
Sam purchased his first property in 2017. This first property was purchased as Sam’s primary residence. Knowing that at some point he planned to be a real estate investor, Sam’s first property was a two-unit property. Sam, his wife, and their new baby lived in one unit and rented out the other until.
Since Sam purchased a primary residence, that he intended to reside in for two years, he was about the use an FHA mortgage and put only 3.5% down. The second rental unit was smaller than the primary unit. The second unit was 2 bedrooms and 1.5 baths. The rent received covered roughly 40% of the total monthly housing payment.
Establishing A Landlord History and Looking Toward the Future
Sam and I initially connected through a referral from a prior client. He had the forethought to initially contact me about six months before he purchased his first property. He did so, to get all of his questions answered and make sure all would look good with his pre-approval.
In our initial discussions, I explained to Sam that financing an investment property is one of the biggest factors lenders consider in rental history. Establishing that initial rental history can be one of the biggest hurdles faced.
How To Establish Landlord History
Two Year Process
The easiest and most common way to establish a landlord history is to start with your first primary residence. If your first property is a single unit, live in the property for one year. After one year, rent the property. At that time, if you have funds to purchase another primary home with a 3% down payment – it is a great time to do so. If you do not have funds at the time to purchase another investment property, consider moving back in with family or friends to collect your rents and build your history.
After one year of collecting rents, you have your landlord’s history established. You must be able to document the rents received. Hold on to all leases and bank statements for the year – you will need these.
One Year Process
If you are looking for a quicker route to establish landlord history – take a page from Sam’s playbook. Purchase a multi-unit property for your first primary home. In that scenario, you can still use an FHA loan to put a minimum 3/5% down. Within one year of collecting rent (don’t forget to document) you will have established landlord history.
The Quickest Process – May Not Be Available To Most
A great thing about the DSCR and other investor loans is that they require only one borrower on the mortgage to meet the landlord’s history requirement. If you have a family member or a very good friend that already has an established landlord history they can partner with you on the mortgage.
This partnership can be long-term, meaning they are permanent 50/50 partners on the investment. The partnership can also be short-term (12-18 months). Once you establish your own 12 months of landlord history, you can refinance the mortgage into your name only and remove the other party.
Back To Sam
After Sam and I discussed the above options in detail, he decided that he was going to focus primarily on 2 unit and single-family properties for his first purchase. His goal was to find a great 2 unit property, but would not pass up on the longer route of a single family if that was the best option available.
Luckily, I was able to pair Sam up with a great local realtor that specializes in investment properties. He was able to find the perfect 2-unit property to live in and rent. Sam has a bright future ahead of him as a long-term real estate investor thanks to the ICF loan.