Traditional vs. Asset-Based Lending for the Real Estate Investor
By Kerry Curry, B2R Contributor
Cash is king, right? Not so fast. Although some real estate investors prefer to buy their properties with cash, many prefer to utilize leverage to finance their investments.
Your first thought might be, “So, I just head to my local bank or mortgage broker and fill out an application.” Again, not so fast. Before seeking financing, it is important to understand the difference between getting a traditional mortgage and an asset-based loan for your real estate investment.
A key difference between a traditional mortgage and an asset-based mortgage is how the lender determines the amount of money it is willing to lend.
Traditional Mortgages Use Personal DTI
In a traditional mortgage, the amount of the loan is based on the debt-to-income (DTI) ratio of the borrower. The lender adds up a borrower’s monthly debt payments and divides them by the borrower’s gross monthly income to get the ratio. Typically, a lender will not permit a debt-to-income ratio higher than 43 percent due to concerns about a borrower’s ability to pay back the loan.
Most homeowners are familiar with this ratio if they have ever purchased a primary (or even secondary) residence.
To apply, the borrower will submit supporting IRS income and wage documents such as W-2’s or 1099s to document their income as well as debt information, including car, student and home loans to document their debts, along with a loan application. The lender will then use this information to calculate the loan amount based on the lender’s assumptions of the borrower’s ability to repay the loan.
Asset-based Lending Looks at Cash Flow
In the past, real estate investors had to seek a traditional mortgage, hard-money loan or some other form of private funding to invest in real estate if they weren’t using cash, but asset-based lending has become more available to rental property investors in recent years.
In contrast to a traditional mortgage, an asset-based lender will evaluate the property DTI or the cash flow of the property. In fact, most asset-based lenders won’t require an applicant to submit a W-2 or 1099s if they are seeking this type of loan, though a background and credit check is generally required.
An asset-based lender will perform a cash flow analysis — based on rental income and expenses — to determine the loan proceeds available to a qualified investor.
Determine Which Loan is Right for You
As you can see, these two types of mortgages are very different in terms of how the lender qualifies the borrower. There may be benefits and drawbacks to each type of lending that the real estate investor will want to consider.
Take the time to become informed on these two types of lending for real estate investments and talk with lenders and other investors to help determine which type of financing may be right for you.
B2R Finance offers rental investors innovative lending products to help unlock equity from existing portfolios and provide the cash needed to build rental portfolios nationwide. For more information about how B2R can help you obtain rental property financing, just call 800-227-8107 or visit http://www.b2rfinance.com/apply-now and follow us on Twitter @B2RFinance.
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