An investor loan based on property cash flow
Most loans are approved based on your personal income.
Not the Investor Cash Flow Mortgage Program.
This loan is gaining popularity with real estate investors because approval is based on the property’s cash flow, not the buyer’s personal income.
The program allows savvy investors to buy properties without tax returns, W2s, or employment verification.
Cash flow loans are opening up a new world of opportunity for today’s real estate investor.
What’s in this article?
What is the Investor Cash Flow Mortgage Program (CFMP)?
The Investor Cash Flow Mortgage Program (CFMP), is an alternative financing solution.
If a property’s monthly income is greater than its mortgage payment, the buyer could be approved.
This is a different method than Fannie Mae or Freddie Mac use. Traditional loans like these must verify the buyer’s personal income for qualification.
Proving personal income is difficult for full-time real estate investors with complex tax returns, or those who don’t have two years of filed self-employed returns at all.
The CFMP loan (also known as the Debt Service Coverage Ratio or DSCR loan) looks at the property’s cash flow instead.
How does the program work?
CFMP lenders compare the property’s potential income versus its all-in payment to come up with a Debt Service Coverage Ratio, or DSCR.
DSCR = Income / Payment
As a simple example, a property with $1,250 in rental income and a $1,000 payment would have a DSCR of 1.25. It brings in 25% more income than it costs to service the debt.
A DSCR of 1.25 is the “magic” number lenders are looking for. Some lenders will approve a loan at a lower DSCR – or no DSCR at all – but may charge higher rates or require a larger down payment or personal income verification.
As you examine homes to buy, find ways to reach the 1.25 number. Look for opportunities to increase rent or decrease the payment.
For residential properties, you can literally calculate DSCR on the back of a napkin.
- Income: The rental income expected on a property.
- Payment: Principal, interest, taxes, insurance, and HOA dues combined.
Use these two numbers to see if a property you’re considering might qualify. Below is a table of income and payment combinations that equal a 1.25 DSCR.
|Rental Income||Full Payment||DSCR|
|$ 750||$ 600||1.25|
|$ 1,000||$ 800||1.25|
|$ 1,250||$ 1,000||1.25|
|$ 1,500||$ 1,200||1.25|
|$ 1,750||$ 1,400||1.25|
|$ 2,000||$ 1,600||1.25|
|$ 2,250||$ 1,800||1.25|
|$ 2,500||$ 2,000||1.25|
|$ 2,750||$ 2,200||1.25|
|$ 3,000||$ 2,400||1.25|
|$ 3,250||$ 2,600||1.25|
|$ 3,500||$ 2,800||1.25|
|$ 3,750||$ 3,000||1.25|
Why does cash flow matter?
Cash flow is important to real estate investors. Without it, you lose money each month, pinning hopes on appreciation.
Counting on home price growth can be a winning strategy for some investors, but Investor Cash Flow Mortgage Program lenders are looking for cash flow.
The reason is simple: the lender can’t rely on the borrower’s income to repay the debt. But it can reasonably assume that the borrower will make the payment if the property produces enough income.
Hence the alternate name for the program: “Debt Service Coverage Ratio” loan. The property’s income “covers” the amount it takes to service the debt.
This method makes logical sense. Why require an investor to prove personal income when the property pays for itself?
The cash flow program is a “make sense” loan instead of a “by the book” one.
How do I prove future income for a property?
Proving cash flow means first proving future property income. Sometimes, the property isn’t currently rented, or is rented at a below-market rate.
Many lenders allow you to provide a Fannie Mae Form 1007/Freddie Mac Form 1000 which is an appraiser’s professional rental analysis.
You might have an idea what the property will rent for, but the lender will need a professional opinion if no current lease exists.
The 1007 will cost some money, but there’s no need to order one for every property you look at. First, determine whether the property has a good chance of meeting a lender’s DSCR requirement. Estimate the rent versus the payment.
Keep in mind that investor cash flow mortgage rates are higher than for traditional loans – maybe around 1-2% higher depending on your scenario. Factor that in when determining your payment.
Following are other things to keep in mind.
- Investor Cash Flow Mortgage down payment requirement: 20-25%
- Credit score: Typically 640+
- Loan type: Fixed rate, adjustable rate, interest only
- Property types: Single-family, 2-4 unit, standard condos, non-warrantable condos, and more
- Property use: Investment only (no principal residences), short-term and long-term rentals
- First-time and seasoned investors are eligible
- No limit on number of financed properties
This program could turn you into a real estate investor, or enhance your current investing strategy.
Also known as a DSCR loan, this program qualifies the loan based on the property’s income, not the borrower’s. If the property has adequate cash flow, the buyer may be approved without supplying personal income documentation.
Yes. A “Qualified Mortgage” is one where the borrower’s income is verified. A loan with no personal income verification is called a “non-QM” or non-qualified mortgage. This means that the loan does not have to follow guidelines set by the Dodd-Frank Act.
No. This program does not require tax returns or personal income verification. Rather, it’s based on the property’s income versus its mortgage payment.
You have to be purchasing an investment property with adequate cash flow as well as meet down payment, credit score, and other requirements.
Leverage the Investor Cash Flow Mortgage Program
Real estate investors are discovering the CFMP loan and leveraging it to enhance their portfolios.
There’s no limit to the number of cash-flowing properties you could acquire with this program.