Buying and closing
From the down payment to the keys: entities, the loan process, the appraisal and what slows a closing down.
Buying an investment property runs on more paperwork and more people than buying a home, and every one of them can add a week. Knowing the order of things is most of what keeps a closing on time.
These guides cover what you need to bring, whether to buy in an LLC, how a DSCR loan moves from application to closing, and how the appraisal works for a rental.
Before you buy
- How much is the down payment on an investment property?
The down payment is the biggest check at closing, but not the only one. Here are the minimums by loan, what moves them, and the costs and reserves that come on top.
- Buying rental property in an LLC
An LLC can hold a rental and borrow for it, but it changes which loans you can use and what you sign. Here is how the financing works, from forming the company to closing.
The loan, step by step
- The DSCR loan process
A DSCR loan moves through five stages and about a dozen steps, with five or six parties involved. Here is who does what at each one, what you need to send, how long it really takes and where the weeks get lost.
- The rental property appraisal
On a rental loan the appraiser decides two numbers, the value and the market rent, and both feed your terms. Here is how each is reached, how short-term rentals are handled and how to answer a low one.
Key terms
- Underwriting
- The lender's review of risk before it approves: the borrower (credit, assets, income or DSCR), the property (appraisal, title, insurance) and the deal (LTV, purpose). The underwriter issues conditions, and the loan is approved when they are cleared.
- Doc type (the way a borrower qualifies)
- How the borrower proves they can pay: full doc (W-2s, tax returns), bank statements, a P&L, 1099s, asset depletion, or DSCR (the property's rent, no personal income at all). Choosing it is the broker's first job.
- OO, NOO and second home
- Owner-occupied (OO): the borrower's main home, the best pricing, consumer rules apply. Second home: the borrower's own occasional use, one unit, limited renting. Non-owner-occupied (NOO): an investment property, priced higher, and where DSCR loans live.
- REO: two meanings
- Real estate owned. 1. A property a lender took back in foreclosure and now sells (bank-owned). 2. On a loan application, the schedule of real estate owned: every property the borrower already owns, with its loans, payments and rents. Investors with portfolios meet the second one on every deal.
- The order of a loan
- Application, then disclosures or a term sheet, processing (documents gathered, appraisal and title ordered), underwriting, conditional approval, clearing conditions, clear to close, closing, funding, recording. The appraisal is ordered early but often arrives last, so it sets the pace.
- Right of rescission
- On a refinance or home equity loan secured by the borrower's main home, the borrower can cancel until midnight of the third business day after closing (Sundays and federal holidays do not count), and the loan funds only after that. The rescission notice explains the right. It does not apply to purchases or to investment and business-purpose loans.
- Full doc
- Income proven the traditional way: pay stubs and W-2s, two years of tax returns for the self-employed, and a verification of employment. The best pricing, and the only way into agency and government loans.
- Bank statement loan
- A non-QM loan for the self-employed: income comes from 12 or 24 months of bank deposits instead of tax returns. Personal statements count deposits in full; business statements count only part of them, an expense factor that often leaves 50 to 85%.
- P&L loan
- Profit and loss statement. Income taken from a profit and loss statement prepared or signed by a CPA, enrolled agent or tax preparer, usually backed by two months of bank statements. For business owners whose tax returns show less than they earn.
- 1099 and WVOE loans
- Written verification of employment. Two lighter doc types. 1099: a contractor qualifies on 1099 forms instead of tax returns. WVOE: the employer fills in a written verification of employment, with no pay stubs or W-2s.