How Do You Finance a Property Without Tax Returns?
If the only thing stopping you from investing in real estate properties is your tax returns, well, here’s some good news for you.
Some of you out there might think that you can’t finance a rental property without tax returns. Well, you know what? You can.
Huh? What? HUH?
We know that might sound like kooky talk, but you really can get an investment property loan minus any sort of tax returns. It takes a little more work, it requires you to be a little more organized, but it is possible.
While getting a conventional mortgage loan can be a challenge if you don’t want to use your tax returns, there are plenty of other kinds of mortgage loans you can use if you want to buy real estate that doesn’t require any sort of tax return. And, lucky for you, we have some of those listed below for your convenience. (You can thank us later.)
A Bank Statement Mortgage
A bank statement loan is a mortgage approval process that allows self-employed borrowers to have income calculated based on bank deposits. With this type of loan, tax returns are excluded from the equation. These require at least a 620 credit score. We can look at either 24-month bank statements or 12-month bank statements to verify income. This type of loan can be used for primary residences and investment properties. Interest rates start as low as 3.99% at a 30-year fixed rate.
1099 Self-Employed Mortgage
This program calculates the borrower’s income based on their 1099 statements. We look at only the last two years’ 1099 statements. The minimum FICO score for this program is 660. We can lend up to 90% Loan To Value. This is for primary residences and investment properties. We can lend up to $4 million dollars. Interest rates start as low as 4% at a 30 year fixed rate.
A P&L Only Mortgage
For well qualified borrowers, a Profit and Loss Only Mortgage is available, This is where income approval is done based on a CPA-prepared profit and loss statement. In addition to the P&L, a CPA needs to provide a letter stating the borrower’s business name, percentage of ownership, how the borrower files tax returns (sole proprietorship, partnership, etc.), and how long the CPA has been filing their returns.
A Rental DSCR or Cash Flow Mortgage
For real estate investors, a Cash Flow Mortgage may be the best option. With a Cash Flow Mortgage, your income approval is based on the cash flow of the property, NOT your personal income. In this case, the tax returns are not provided. The appraiser will do an analysis of fair market rent to confirm the property pays for itself. And as an added bonus, a Cash Flow Mortgage is a win-win for many investors because it also doesn’t have a restriction on how many properties you currently have financed. We do not look at your Debt-to-Income Ratio. We only look at the income that the property is generating.
Deciding on what kind of rental property loan is right for you is the first and most important step when investing in real estate, but by no means is it the last one. Like we mentioned earlier, this isn’t like conventional mortgage loans where you just show you tax returns and you’re basically home-free. You’re going to have to put a little more sweat equity into rental property investing. (That was a little real estate humor for you…we regret nothing.) Below are some helpful tips to making sure that getting your real estate investment loans are as painless as possible:
1 – Maximize your credit score
Your credit score helps evaluate how likely you are to pay your debts (and how much debt you have). No matter which type of loan you apply for, you must meet certain credit score requirements. The better your credit score, the better your rate and likelihood of qualifying for a loan, particularly a non-qualified loan if you don’t want to share your tax returns.
2 – Maximize your savings
Any time you investing in real estate, you’ll need to provide a down payment. The bigger your down payment — and the more money you have in the bank overall — the better chance you’ll have at getting a loan. Lending qualifications remain the same whether you’re self-employed or have a W-2, but the minimum down payment and required asset reserves may be higher than with a conventional loan. Maximizing your savings and credit score will help you get a better loan, no matter what your employment profile looks like.
3 – Pay off your debt
This might seem like a big, giant “NO DUH!”, but before you purchase any sort of rental property, you should pay off as much of your debt as possible. Not only does paying off your debt increase your credit score, but lenders will also want to see that you have a low debt-to-income ratio. Your debt-to-income ratio is calculated by simply dividing all your monthly payments (debts) by your gross monthly income. An acceptable DTI (Debt-to-Income Ratio) will vary by money lender and the type of loan you’re applying for, but a lower DTI is usually always beneficial to ensure a higher chance of approval and a lower rate.
4 – Organize your documentation
That’s really just a nice way of saying, “Time to get your s**t together.” Whether you are a self-employed borrower or a salaried borrower, you’re going to have to show sufficient income to prove you can afford your loan. The difference will be what type of documentation you will need to provide. If you’re self-employed or a business owner and decide to go the non-qualified mortgage route so as not to need to provide your tax returns, you’ll still need those bank statements and asset statements so your money lender can determine how much they think you can afford.
5 – Get pre-approved for a loan
Simply put, a loan pre-approval is a preliminary approval based on information you provide (either verified or unverified by the money lender) that gives you an idea of how much you can afford and the terms by which the lender is willing to make you a loan. (Pro-tip: If you’re in the market for a non-qualified mortgage loan, tell money lenders that you want a bank statement or low-document loan and see what they have to offer.)
So, the next time you’re thinking about investing in real estate but don’t want to use your tax returns and someone tells you that you can’t, here’s the best clapback: Simply follow our instructions, get that non-qualified loan, buy that rental property, and show it off to whoever said that nonsense.