What are cash flow loans and why should international real estate investors care?
July 26, 2023 • 4 min read
What are cash flow loans and why should international real estate investors care? As an international investor looking to purchase rental property in the United States, qualifying for financing can be tricky. Traditional mortgage lenders want to see stable income and assets, which can be difficult to prove if you live and work overseas. However, there is a better option that looks at the projected cash flow of the property itself to determine loan eligibility - the cash flow loan.
What is a cash flow loan?
A cash flow loan, sometimes called a DSCR (debt service coverage ratio) loan, is a type of financing where eligibility is based on the anticipated rental income of the property. Instead of verifying your personal income and assets, the lender analyzes the property’s expenses, rents, vacancy rates, and other factors to calculate the debt service coverage ratio. As long as there is enough net operating income to cover the proposed mortgage payment by a certain factor, usually around 1.20, you can qualify for the loan.
The benefits for international real estate investors
For international buyers, cash flow loans offer two major advantages:
More ways to Qualify - Since these loans look at property performance rather than personal finances, they are much easier to obtain as a foreign investor. You don’t have to prove overseas income or move funds from your home country.
Purchase as Investment Property - Cash flow loans are designed for income-producing rentals. This allows foreign buyers to purchase property that will generate ongoing cash flow without ever having to occupy the home.
While the qualifying process may be easier, cash flow loans do have some limitations to be aware of. The purchase price and loan amounts tend to be lower than a traditional mortgage. The down payment requirements are also higher, usually 25-35%. And there may be restrictions on the acceptable property types and locations. But for international real estate investors who want to add US rental property to their portfolio, cash flow loans provide a great financing solution.
These unique loans are ideal for certain investor profiles:
- Out-of-town or foreign buyers - Since they don’t have to verify US income and assets, cash flow loans allow investors who live overseas to finance investment property.
- New real estate investors - The loan focuses on the real estate, not your financial profile. Less experienced investors can qualify more easily.
- Investors with great properties but limited finances - The lender cares more about the cash flowing in than your income. These loans work for those with a high-performing rental but lower personal income.
- Those with alternative income sources - If you have irregular income from sources like investments, royalties, bonuses etc, the cash flow loan allows you to leverage the income from the property rather than your own finances.
- Retirees and pensioners - For those with fixed retirement income, it’s difficult to qualify for large mortgages. Cash flow loans look beyond this to the rental income.
As you can see, these loans cater to international investors who want to add US real estate to their portfolios.
DSCR loans vs conventional mortgages
Before applying for a cash flow loan, it helps to understand some ways in which they differ from traditional mortgages:
- Qualifying Factors - Conventional loans look at your income, assets, credit score and financial history. Cash flow loans base qualification primarily on the projected rental income and expenses.
- Interest Rates - Cash flow loans typically have slightly higher rates, around 0.5 to 1% higher than comparable conventional loans.
- Loan Amounts - Since they carry more risk, cash flow loans typically have lower maximum amounts than conventional mortgages. Many are capped at around $1 million.
- Down Payments - To mitigate risk, cash flow loans require higher down payments - usually around 25-35%. Conventional loans can be as low as 3%.
- Allowable Properties - Conventional loans can be used to purchase just about any residential property. Cash flow loans are limited to investment properties that meet debt service coverage requirements.
If you’re set on purchasing a US rental property but don’t want the hassle of verifying overseas income, the cash flow loan’s benefits for international buyers outweigh the minor limitations.
How international investors can get started
Rather than trying to find DSCR lenders on your own, the easiest way to get started is by completing an online mortgage application with Milo. Our system will match you with appropriate cash flow loan options. With our fast digital process, you can get pre-approved in as little as 5 minutes and lock in low interest rates.
Whether you’re an overseas buyer investing back home or an international investor placing capital into US real estate, cash flow loans eliminate the headaches of verifying foreign income. Milo’s online platform simplifies the application process so you can qualify and close on your investment property loans entirely remotely. Unlock the benefits of leveraging US rental income by [applying today](https://app.milo.io/accounts/#/welcome?locale=en&onClose=https%3A%2F%2Fwww.milo.io%2Fmortgage%2Fmortgage-for-foreign-nationals%2F&fuid=7226460b-4609-4615-9482-ab4c4184f78c&a_id=257b28e8-9e95-406a-bba9-cc8b90f1720f&u_id=30ym2i0kvvYna4oSL89XkEpnnvD2&redirect=%2Fhome)!
The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.
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