No Income Verification Loans: DSCR
I’ve mentioned this “horror story” a few times in my blogs.
In 2005, I was at a Christmas party where a wholesale rep from SunTrust Bank was bragging about his “no down payment” (100% LTV) “NINA” Loans for investors.
NINA stood for “No Income/No Asset” verification.
Borrowers only needed a 680-credit-score and they could buy investment properties with no down payment and no income or asset verifications.
If it sounds crazy, it should.
Those loans were effectively free options to buy a home. If prices went up, great!
If prices went down, borrowers walked away – like they did en masse in 2008 – b/c they had so little to lose.
Why did SunTrust offer such stupid loans? B/c they knew they could sell them to another “greater fool**” and b/c the entire world thought home prices would appreciate forever (not so much).
**The “greater fools” included Fannie Mae and fund managers who were bamboozled by the rating agencies, that insisted the loans would perform, and the overall housing hype.
I left that Christmas party very depressed b/c I knew the end was coming (something else I mention often).
P.S. I should remind readers again that today is very different b/c underwriting standards are much stricter, down payment requirements are much larger in most cases, homebuying demographics are far better with millennials coming into homebuying age, and inventory levels in general are far lower b/c builders have been building at about 50% of the pace they were at prior to 2008.
Anyway, on that nice note, I want to segue into the 2021 equivalent of “stated income loans” or something that is very close to them.
BUT – they are not going to tank the housing market! This is b/c they require large down payments, asset verifications, and a form of income verification.
The loans are called Debt Service Coverage Ratio or DSCR Loans.
They are also referred to as “Investor Advantage Loans” b/c they are ONLY available to investors – buying rental properties.
Almost every buyer who lacks sufficient verifiable income to qualify for a conventional mortgage can take advantage of these DSCR Loans – as long as she has sufficient down payment funds and owns a primary residence.
This is b/c the down payment requirements range from 20% to 30%, depending on credit score.
DSCR underwriters use the rental income from the property itself for “income.” But, if credit scores are over 700 with a down payment of at least 25%, even rental income is ignored.
So, these are effectively an alternative to “hard money” but with lower down payment requirements and much lower rates (in the 5-7% range) and fees (1 to 2 points depending on loan amount).
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