Learning the differences between real estate programs can turn you from a real estate newbie to a real estate pro.

Rental property real estate loans are definitely not “one size fit all.” There are MANY different financing options for rental properties that, depending on your finances, you’ll need to consider before getting into the property purchasing game.

Real estate investment programs are like tools in a toolbox…once you learn the use for each, then you can easily build things. (Wealth…we’re talkin’ wealth in this case.) And learning the differences between real estate programs and which ones work best for you can turn you form a real estate newbie to a real estate pro.

So, for you pleasure, here is your full guide to different real estate investment programs. (Please thank us when you win the trophy for real estate MVP…that’s a thing, right?)

Rental property loans

First things first, let’s answer the question, “What is a rental property loan?” Great question, glad you asked. Also known as an investment property loan, a rental property loan is a first lien mortgage loan (aka, a loan secured with real estate as collateral) secured by an SFR (aka, “single family residence”) that is occupied by a tenant rather than an owner. When done properly, getting that rental property loan, buying your desired real estate, then renting out that desired real estate is a great way to generate a passive income stream that can help you from now until retirement, not to mention that that rental property diversifies your investment portfolio and creates an asset that grows in value over time.

The good news is that rather than a conventional loan where money lenders pour over your tax information, a rental property loan is approved based on the value of the rental property or the rental income of the property. The approval process of rental property loans tends to be a little quicker as well, which is perfect if you’ve found the ideal rental property and wanna jump on it quick.

Fix and Flip loans

Fix and Flip loans are short-term, real estate loans designed to help a property investor purchase and renovate a property in order to sell it at a profit—generally within 12 to 18 months. They are most often used to purchase residential properties at auction or foreclosure, to finance renovations and upgrades, or to cover other expenses associated with the ownership of the property. Unlike traditional home loans, which are long-term investments designed to help the borrower purchase a home that will serve them for decades, fix & flip loans are designed to do exactly what they’re named for: renovating and reselling a property in a short time period.

What’s great about fix and flip loans is that you typically get the money quickly with more flexible terms than a regular mortgage. A fix & flip loan is backed only by the property for which it was granted, so if you run into any major obstacles, you won’t actually lose your home. As an added bonus, it’s also the type of investment property loan that allows for investors to diversify their portfolios.

Bridge loans

Simply put, a bridge loan is just a sum of money lent by a bank or money lender to cover an interval between two transactions, typically the buying of one house and the selling of another. It’s short-term financing used until a person secures permanent financing or removes an existing obligation. Bridge loans are temporary loans secured by some type of asset, usually a home.

The bridge refers to the gap between one loan and the other when you don’t have any capital. For instance, you can place your home on the market, take out a bridge loan against the home, and use that bridge loan to pay the down payment on your new home. The bridge loan allows you to purchase your new home while you wait to sell your old one.

That’s why bridge loans are so popular (and so effective) in the real estate industry. Property investors can use bridge loans toward the purchase of a new home while they wait for their current home to sell. A bridge loan can also help you get a leg up over other buyers in a hot housing market. For example, if a seller is interested in a quick sale (because they always are), the seller may be more willing to make a good deal for a buyer who has the money to close quickly.

Conventional loans

Considered the most common in the mortgage industry, conventional loans are any type of home buyer’s loan that is not offered or secured by a government entity. Instead, conventional loans are available through private lenders, such as banks, credit unions, and mortgage companies.

Conventional mortgages typically have a fixed rate of interest, which means that the interest rate does not change throughout the life of the loan. Conventional mortgages or loans are not guaranteed by the federal government and as a result, typically have stricter lending requirements (looking more at your tax returns than any other type of loan) by banks and creditors than investment property loans.

Bank statement loans

A bank statement loan is a loan where you prove your income to money lenders by showing them one or two years of regular deposits in your bank statement. It allows you to verify your income on a mortgage application using documented bank deposits instead of tax forms. A bank statement loan requires much less documentation. The borrower’s ability to repay is based on an analysis of the money going into and out of their bank statement each month over a period of time. Business bank account statements are used most often, but bank statement loans can also be made based on personal bank statements as well.

Basically, if you are a borrower looking into investment properties, have a solid credit score as well as a strong financial record, but don’t have traditional tax documents to verify your total income, or you have tax documents but, due to write-offs, your income looks smaller than it really is, then a bank statement loan may be the way to go.

1099 loans

1099 earners can actually qualify for investment property loans via, you guessed it, a 1099 loan. By using 1099 earning statements in lieu of tax returns, underserved borrowers have an alternative loan solution that helps many self-employed 1099 earners invest in real estate property.

Instead of your tax return, typically one to two years of the most recent statements are required for a 1099 loan and the borrower must be employed with a single employer for two years. Money lenders also look at your credit history to see whether you have managed your debt well in the past.

Rental DSCR loans

DSCR simply stands for “debt service coverage ratio.”  It’s a formula used to determine if there is enough cash flow from rental income received on the property to “cover” or “service” the outstanding monthly debt on said property. Your DSCR will not only determine whether you get financing for a property in the first place, but it will absolutely determine whether your investment will be successful over the long term.

The formula for calculating debt service coverage ratio is pretty straightforward. The DSCR for real estate is calculated by dividing the annual net operating income of the property (NOI) by the annual debt payment. Usually, anything between a 1.1 and 1.2 DSCR calculation (meaning the rent is 100 to 120% of the monthly expenses) is considered a sufficient cash flow to cover the outstanding monthly debt, which typically consists of principal, interest, taxes, insurance, and any dues if part of a condo association. The higher your DSCR metric is above 1.0, the more likely there’s enough of a cash-flow cushion to cover debt obligations, which is the sweet spot you really want.

The main benefit of a DSCR loan is that it allows money lenders to focus more on borrower credit and property cash flow and less about the borrower’s personal income. When investing in real estate with a DSCR loan, you don’t need proof of income via tax returns or pay stubs because either you don’t have it, or your income doesn’t represent your true income due to write-offs and business deductions. The process and documentation requirements for DSCR loans are also much less restrictive than conventional loans.

An additional benefit of a DSCR loan is that many money lenders will allow borrowers to purchase properties in the name of an LLC or corporation which is typically something that conventional lenders will not allow. This is highly beneficial to investors as holding a property in an LLC has potential tax benefits to the investor and reduces exposure from a liability standpoint. So, it’s kind of a win-win, ya know?

Hard money loans

Very similar to a bridge loan, a hard money loan is a short-term, non-conforming loan (aka, a loan that doesn’t meet Fannie Mae and Freddie Mac’s standards for purchase) and is typically tied to the actually investment property that is being purchased. It also typically does not come from traditional lenders, but rather private companies that accept property or an asset as collateral.

Because hard money loans are usually sought by property investors who plan to renovate and resell the real estate that is used as collateral for the financing, the terms of the loan are based mainly on the value of the property, not on the creditworthiness of the borrower.

Hard money loans are perfect if you have an investment property opportunity and want to avoid the lengthy process of getting approved for a loan through traditional means. Unlike traditional mortgages, hard money loans come with a fast and typically less stringent approval process, making them ideal if you need to make the purchase happen fairly quickly.

Stated Income loans

Once upon a time, there was a thing called a stated income loan. A stated income loan is a mortgage where a money lender or bank doesn’t verify a borrower’s income by looking at their pay stubs, not by their W-2s,, not by income tax returns, and not by any other tax or financial records. Nope. Instead, borrowers simply state what their income is, the bank just takes them at their word, and boom, a stated income loan is granted.

So, what happened to stated income loans? Well, the housing market crash of 2008 happened.

Stated income loans don’t exist like they used to, but they are still offered in their new form, typically by independent money lenders or by small local banks. Qualification requirements are based on stable employment, good cash reserves, and good credit score. Today, borrowers cannot take out a home loan without providing proof of their ability to repay the loan. Lenders must fully document this proof and borrowers are required to submit the proper documentation.

However, these new stated income loans require no income documentation nor tax returns for self-employed borrowers. So, if have a good credit score, a large number of reserves, and a significant down payment, the more likely you are to be approved and get favorable interest rates for your stated income loan. But whatever real estate program your looking for, The Loan Guys have got you covered