Homebuyers can potentially save a significant amount of money by buying a foreclosed home at auction. However, buying a house at auction typically means you’ll need lots of cash on hand, making buying at auction different from buying conventionally.
There are ways, though, to acquire a home at auction, even if you don’t have the entire amount in your savings account for a down payment. Many investors turn to fix-and-flip or rental investment loans to overcome these challenges. These loans are designed to meet the needs of real estate investors, often providing faster access to the funds needed to complete a non-owner-occupied home purchase.
Short-term financing with bridge (fix-and-flip) loans
A bridge loan, also referred to as a fix-and-flip loan or a “hard money” loan, is a short-term lending solution that caters to real estate investors to finance an investment property. This loan option benefits fix-and-flip investors who want to renovate a property and sell it for profit in a short amount of time.
Private lenders issue bridge loans for non-owner-occupied properties as opposed to mainstream financial institutions that offer traditional options like FHA and conventional loans.
Unlike traditional bank loans, bridge loan eligibility is based on the property’s value. The lender will consider the market value and condition of the house to make sure they feel it is valuable enough to secure the loan.
Specifically, the lender focuses mainly on the property’s after-repair value (ARV), which estimates what it will be worth once the renovations are completed. The lender will often also provide funds for the renovations to ensure buyers maximize their ROI when it’s time to sell the property.
However, traditional lenders review borrowers’ income and assets, which can be time-consuming and require a lot of paperwork and time from the borrower. The borrower’s personal information, like credit score and credit history, will determine whether or not they’re approved and what kind of interest rate they’ll receive.
A bridge loan will often work for homebuyers at an auction because these lenders are usually willing to move fast. They can often provide you with funds to complete a purchase in days, instead of weeks or months.
Long-term financing with rental investment loans
When purchasing a property as part of a buy-and-hold strategy, a typical non-qualifying mortgage debt-service coverage ratio (DSCR) loan, also known as a rental investment loan or rental loan, allows you to qualify for a loan based on the cash flow generated from a rental investment property. With this type of loan, you can finance a new purchase, refinance a property you own, or free up cash in your rental portfolio to gain asset appreciation and cash flow.
In contrast to traditional lenders, real estate investment lenders use the debt-service coverage ratio, or DSCR, to determine the maximum loan amount when a borrower is applying for a new loan or refinancing an existing one.
DSCR measures your ability to service or repay the annual debt service compared to the amount of net operating income (NOI) the property generates. The larger the DSCR ratio is, the more net operating income is available to service the debt.
Because the lender is not looking at personal income, they can offer an easy documentation process (no tax returns or employment verification) and no cash reserve requirements. It’s a more streamlined way to obtain funding than traditional banks that don’t provide this added agility. Many investors who do multiple deals in a year will only do those deals using DSCR loans because they don’t have time for conventional mortgages.
Finding a lender for your investment properties
Xome is working with select lenders to make it easy for investors to find the right financing for their investment properties. Investors can enjoy a smoother, simpler buying process through these approved partnerships.
Xome is partnering with Kiavi, formerly known as LendingHome. Founded in 2013, Kiavi has become one of the largest lenders to real estate investors in the United States and provides flexible bridge and rental loan options. Through Kiavi’s digital platform, real estate investors are empowered to make smarter decisions, gain access to funding faster, and scale their businesses.