Loan to Finance the Purchase of Real Estate: Mortgage Financing Options

Looking for a loan to finance the purchase of real estate? 

When it comes to looking for a loan to finance the purchase of real estate, traditional banks and mortgage lenders often have rigid requirements that exclude many qualified borrowers. Whether you’re a freelancer with variable income, a self-employed professional who writes off significant business expenses, a real estate investor seeking portfolio expansion, or someone with unique financial circumstances like recent career changes or alternative income sources, conventional mortgage lenders might just show you the door before you’ve even managed to take a step inside. 

Their one-size-fits-all mortgage financing options – typically limited to conventional, FHA, and VA loans – fail to account for the diverse financial profiles of today’s borrowers. These inflexible lending practices leave many capable buyers unable to access the funding they need, despite having the means to successfully maintain mortgage payments.

The stats bear this out, too: According to Truss Financial Group, a whopping 49% of self-employed mortgage applications are denied.

In fact, the average rejection rate for mortgage applications recently hit an all-time-high at 20%. That means 1-in-5 people who submit an application for a mortgage get denied.

Well, we here at Defy Mortgage don’t like that at all. We refuse to accept restrictive lending that keeps people locked out of the market. Instead, we help qualified individuals become homeowners and empower real estate investors through our selective — yet flexible — lending requirements, which remain far more attainable than what typical banks offer.

That’s why we specialize in providing flexible, non-traditional lending solutions tailored to your needs: non-QM loans. That means simple, efficient and secure mortgage financing options, backed by decades of experience.

Let’s dive into everything you need to know about getting a loan to finance the purchase of real estate, what your mortgage financing options are, what real estate financing even is, and how to find the best lending partner for your specific journey.

What is Real Estate Financing?

Real estate financing refers to the process of borrowing funds to purchase, renovate, or invest in property. 

By leveraging financing, you can grow your portfolio, diversify your assets, and build long-term wealth without requiring a ton of money upfront.

While buying out of pocket would be nice, in today’s day and age, with home prices anywhere from 3-6x+ most people’s annual income, almost everyone will need to finance at least some of their home purchase. 

Luckily, you have options…

What Are the Different Ways to Finance My Real Estate Purchase?

There are both traditional and non-traditional mortgage financing options. While many are familiar with conventional loans, FHA loans, and VA loans, alternative options like bank statement loans, Debt Service Coverage Ratio (DSCR) loans, and self-employed mortgages offer flexible solutions for unique financial situations.

Man buying home with loan to finance the purchase of real estate

Each has its own benefits depending on your situation. Here’s a breakdown of the most common options:

1. Conventional Loans

Conventional loans are the standard option for purchasing investment properties. They typically require a higher credit score and down payment but offer competitive interest rates.

Best For: Borrowers with strong credit and stable income.

2. FHA Loans

FHA loans are government-backed loans that allow you to buy a multi-unit property and live in one unit while renting out the others. They require occupancy for at least 12 months.

Best For: First-time homebuyers or those with lower credit scores.

3. VA Loans

VA loans are exclusively for eligible military borrowers and allow the purchase of properties with up to seven units.

Best For: Veterans and active-duty service members.

4. Non-QM Loans

Non-Qualified Mortgage (Non-QM) loans are designed for borrowers who don’t fit the traditional lending mold. These mortgage financing options don’t require tax returns or extensive documentation, making them ideal for freelancers, self-employed individuals, and real estate investors.

Best For: Real estate investors, freelancers, self-employed professionals, business owners, and those with non-traditional income streams or lower credit scores.

Here’s a brief overview of some of the most popular non-QM loans, including bank statement loans, self-employed mortgages, and debt service coverage ratio loans:

Bank Statement Loans

Bank Statement Loans are a flexible mortgage financing option for borrowers whose income may not be easily documented through traditional methods like W-2s or tax returns. Instead of focusing solely on reported income, lenders evaluate your bank account deposits over the past 12-24 months to determine your ability to repay the loan.

This option is particularly useful for:

  • Freelancers
  • Self-employed individuals
  • Business owners
  • Contractors

How It Works:

  • Borrowers submit 12-24 months of personal or business bank statements.
  • Lenders analyze your deposits to assess income and cash flow.
  • Tax returns are often not required, making this ideal for those who take significant deductions on taxes.

pexels rdne 8293720 | Defy Mortgage

Benefits:

  • No need for traditional income verification.
  • Accommodates borrowers with fluctuating income.
  • Easier qualification process for business owners who reinvest earnings.

Drawbacks:

  • Higher interest rates compared to conventional loans.
  • May require a larger down payment.

Self-Employed Mortgage

Self-employed individuals often face challenges qualifying for traditional loans due to irregular income or heavy deductions on tax returns. A self-employed mortgage offers a tailored solution for borrowers with non-traditional income sources.

Who It’s For:

  • Entrepreneurs and business owners.
  • Freelancers, gig workers, or independent contractors.
  • Investors with multiple income streams.

Key Features:

  • Flexible income verification: Lenders may use bank statements, profit-and-loss statements, or 1099s to evaluate income.
  • Allows for deductions: Heavy business deductions on taxes won’t necessarily disqualify you.
  • Custom solutions: Loan terms are designed to accommodate variable or seasonal income patterns.

Benefits:

  • No penalty for being self-employed.
  • Greater flexibility in underwriting criteria.
  • Ideal for borrowers with strong financial habits but unconventional income.

Challenges:

  • Potential for higher down payments and interest rates.
  • Additional documentation may be required, such as business licenses or CPA letters.

Debt Service Coverage Ratio Loans for Real Estate Investors

A Debt Service Coverage Ratio (DSCR) Loan is specifically designed for real estate investors. Instead of focusing on the borrower’s personal income, lenders use the property’s rental income to determine eligibility.

How It Works:

  • The DSCR measures the property’s ability to cover loan payments through its cash flow.
  • A DSCR of 1.0 or higher typically qualifies, meaning the rental income equals or exceeds the loan payment.
  • Borrowers repay the loan using rental income generated by the property.

Example:

  • If a property generates $2,000 in monthly rental income and the loan payment (including principal, interest, taxes, and insurance) is $1,800, the DSCR is 1.11 ($2,000 ÷ $1,800).

Why It’s Popular:

  • No personal income verification is required.
  • Allows investors to qualify for loans based on the performance of the property.
  • Great for scaling portfolios, as it doesn’t rely on personal debt-to-income ratios.

Benefits:

  • Simplified underwriting process.
  • Leverages rental income to secure financing.
  • Mortgage financing option ideal for investors looking to expand portfolios quickly or maximize ROI

Drawbacks:

  • May require a higher down payment (e.g., 20%-25%).
  • Interest rates can be slightly higher than conventional loans.

Why Choose a Non-QM Loan?

Non-QM loans are a game-changer for borrowers who don’t fit the traditional lending criteria. Here’s why they might be the best option for you:

  • No Tax Returns Required: Perfect for self-employed individuals or those with complex income structures.
  • Flexible Underwriting: We consider your unique financial situation, not just your credit score.
  • DSCR Options: Use rental income to qualify, making it easier to finance investment properties.
  • Personalized Service: Work closely with our experts to craft a loan that fits your needs.
  • Fast and Efficient: We streamline the process to get you funded quickly.

Why Choose a Conventional Loan?

While Non-QM loans are ideal for many, conventional loans remain a solid choice for borrowers with stable income and strong credit. Here’s why you might consider a conventional loan:

  • Competitive Interest Rates: Lower rates for qualified borrowers.
  • No Occupancy Requirements: Ideal for investment properties.
  • Long-Term Stability: Fixed-rate options provide predictable payments.
  • Defy Mortgage Advantage: Our conventional loan products are designed with flexibility in mind, ensuring you get the best terms for your situation.

How to Obtain A Loan To Finance The Purchase of Real Estate?

Savvy investors know that financing real estate doesn’t require a huge pile of capital—it requires understanding your mortgage financing options. Follow these steps:

  1. Define Your Goals: Are you buying a primary residence, a vacation rental, or an investment property?
  2. Know Your Options: Compare traditional loans (FHA, VA, conventional) and non-QM options (DSCR loans, bank statement loans).
  3. Work With Experts: Partner with lenders who specialize in real estate financing tailored to your needs, like Defy Mortgage.
  4. Evaluate Your Budget: Understand loan terms, interest rates, and repayment plans.
  5. Act Strategically: If you’re an investor, decide between short-term rentals (STR) and long-term rentals (LTR) based on your market and goals.

Real Estate Financing FAQs: Loan to Finance the Purchase of Real Estate

  • What is a loan to finance the purchase real estate called? A mortgage. A mortgage is a loan to finance the purchase of real estate.
  • What is an investment property?
    An investment property is any real estate purchased with the intent to earn a return through rental income, resale, or both.
  • Do I need to obtain a home loan to finance the purchase of real estate? No, but here are the benefits to obtaining a mortgage: (list them out)
  • How do I choose the best loan for my property?
    Evaluate your financial situation, credit score, and investment goals. Speak with a lender like Defy Mortgage to explore your options.
  • What are different ways to finance my real estate purchase? On the lending side, you have traditional and non-traditional options. Traditional options include conventional, FHA, and VA loans while non-traditional options include bank statement loans, self-employed mortgages, and DSCR loans.
  • What are the minimum requirements for investment property loans?
    These vary by loan type but typically include a down payment, credit score, and proof of income or rental income potential.
  • What is a non-QM loan and how does it work?
    Non-QM loans offer flexible underwriting and don’t require traditional income documentation, making them ideal for borrowers with non-traditional financial profiles.
  • What are the pros and cons of DSCR loans?
    Pros: Qualify using rental income, ideal for scaling portfolios.
    Cons: May require a larger down payment and higher interest rates.

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