applicants must be active service members, military veterans, or the surviving spouse of a veteran. For FHA mortgages, the loan limit is quite a bit lower than conventional mortgages, so you’ll be restricted in your choice of property. These mortgages also come with a rule that they can be used only for a primary residence. Applicants must live in the property they buy with either of these loans. That’s where “house hacking” comes in. House hacking is the practice of buying a multiunit property, living in one unit, and renting the others to lower or cover the entire cost of the monthly mortgage payment. Investors are allowed to buy a multiunit property with a VA or FHA mortgage as long as they use one of those units as a primary residence. FHA mortgages can be used on secondary homes in some limited circumstances, but only if you’re experiencing housing hardship. A DEBT SERVICE COVERAGE RATIO LOAN A debt-service coverage ratio (DSCR) loan is an unconventional type of mortgage that’s often used on investment properties. The approval process for a DSCR loan looks at potential rental income from the investment property instead of the financial profile of the prospective buyer. If the investment’s rental income will comfortably cover mortgage payments, the lender will be inclined to give you the loan. This type of mortgage can be a lifesaver for investors who’ve found an amazing investment opportunity but, for whatever reason, would have a tough time getting approved for a conventional loan. The debt service coverage ratio is calculated by dividing the investment property’s projected net operating income
by the amount of annual debt. A ratio of 1 means the projected rental income is equal to the debt payments. A ratio of less than 1 means the income won’t be able to cover the debt payments. When the ratio is larger than 1, the investment starts to look more appealing. Lenders generally want to see a DSCR ratio of at least 1.2, meaning you’ll be able to make your debt payments with a good amount of cash left over for operating expenses. The higher the debt service coverage ratio, the more cash you’ll have on hand after making your mortgage payments, which translates to less risk for the lender. Although DSCR loans can be used on virtually any type of investment property and allow investors to bypass the lengthy conventional mortgage approval process, they do come with some drawbacks. Interest rates can be higher than for conventional loans, loan fees can be significant, and buyers may have to put down 20% or more upfront. HARD MONEY LOANS Hard money loans, sometimes called bridge loans, are loans from private companies or individuals that investors often use. These loans require the borrower to secure the loan with assets, such as a home, as collateral. Investors who flip houses often use hard money loans to finance their next investment while preparing to sell their previous one. Similar to DSCR loans, hard money loans can be approved much faster than a conventional mortgage and are based more on the financial viability of the investment than on the individual investor’s financial profile. For this reason, they’re often used by house flippers and investors. They also come with drawbacks. The interest rate on hard money loans can
be double the rate of conventional mortgages, and they come with very short repayment terms, typically one to two years. Hard money loans are fast business loans that are priced at a premium for lucrative, short- term real estate investments. Mortgage assistance programs are providing real estate investors with pivotal support amid economic uncertainties, fueling a property investment boom. Through creative financing strategies like “house hacking” with FHA and VA loans and leveraging unconventional mortgage types like DSCR and hard money loans, investors are maximizing their returns and overcoming traditional financial barriers. These programs not only facilitate the acquisition of properties with minimal upfront costs but also cater to those facing financial challenges, thereby expanding opportunities for profitable investments across various sectors of the real estate market.
LUKE BABICH
Luke Babich is the co-founder of Clever Real Estate, a real estate education platform committed to helping homebuyers, sellers, and investors make smarter financial decisions. Babich is a licensed real estate agent in the state of Missouri. His research and insights have been featured on BiggerPockets, Inman, the Los Angeles Times, and other online and media outlets. Babich earned a bachelor’s degree in political science, with honors, from Stanford University.
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