Our guide outlines how to use commercial loans to purchase rental properties without income verification or tax returns.
Borrowers often turn to commercial loans for two reasons:
Commercial loans like DSCR (Debt Service Coverage Ratio) loans solve these problems by not relying on a borrower's debt-to-income ratio. Instead, lenders assess a property's DSCR, which divides net operating income (monthly rent) by total expenses (mortgage repayments, insurance, taxes, etc.).
For example, if a property generates $1,200 per month in rent and has $1,000 in expenses, its DSCR would be 1.2.
While minimum DSCR requirements vary by lender, Constitution Lending offers financing for properties with a DSCR as low as 0.75.
Since you aren’t limited by your debt-to-income ratio, you can use DSCR loans to qualify for unlimited financing, provided the property meets the minimum 0.75 DSCR requirement and you have sufficient capital for the down payment, typically ranging from 20% to 25%.
Additionally, since the loan is underwritten based on the property rather than your financial profile, you don’t need to submit tax returns, proof of employment, or income verification.
This article is broken down into steps on how to grow your investment portfolio using commercial loans to purchase rental properties.
You can use our DSCR loan pricer to receive an instant quote and see which loan options you qualify for.
As we alluded to above, the most important factor determining whether you can qualify for a DSCR loan is a property’s DSCR.
This means you must know the basic financials of the property you want to purchase before approaching a lender. This includes how much cash flow it can generate and whether it is enough to settle monthly expenses and meet the minimum 0.75 DSCR requirement.
So, before you start your loan application, we recommend:
If this number is higher than 0.75 and you meet all other lender requirements (660+ FICO score, 20% to 25% down payment), you’ll likely qualify for a DSCR loan.
Alternatively, you can use our DSCR loan pricer to get a more accurate figure.
All you need to do is enter the property’s asking price, the total loan amount you want to qualify for, and an estimate of the rental income the property can generate. The pricer will then provide you with your exact monthly payments (including mortgage payments, property taxes, and insurance) as well as your property’s DSCR.
As shown in the screenshot below, if you’re buying a single-family home in California with a cash flow of $2,500 per month for $300,000 at 80% LTV, your expected DSCR is approximately 1.1.
Side note: Our pricer also displays the interest rates and buydowns you qualify for based on your FICO score, total loan amount, and LTV. Feel free to adjust these figures to see how each factor affects your interest rate options and the property’s DSCR.
In our real estate investing experience, we find that the biggest mistake borrowers make when seeking funding is choosing brokers over direct lenders.
A problem with many "lenders" is that they reject loan applications right before closing.
We've been in this situation ourselves. Loan officers would tell us that we qualified for a loan without any problems, but once we’d be deep into underwriting, they’d inform us that our application had been rejected. We’d then have to restart the application process from scratch with another lender, and by then, the investment property we wanted to purchase had already been sold.
This happens because borrowers often partner with brokers, who serve as intermediaries between them and the actual lender.
In most cases, these brokers don't have a thorough understanding of the lender's requirements to determine if a borrower qualifies by simply reviewing their documents. They often need to ask the lender to begin underwriting before informing the borrower of their eligibility.
This process is what causes loans to fall through right before closing.
At Constitution Lending, we are direct lenders. We use our capital to fund your loan, and because we’ve created our own requirements (rather than adhering to another lender’s), we can provide you with an answer regarding your eligibility immediately after you submit your documents. This helps prevent those stressful last-minute rejections.
Read more: 5 Best DSCR Lenders (2024 Comparison)
Another problem we see with many lenders is their lengthy application process, which makes it difficult to close quickly.
You typically have to fill out an application form on their website, wait multiple business days for a loan officer to call you, and spend an hour talking to them and answering questions before getting a quote and pre-approval letter. Then, they may take a week or two to underwrite before closing. This drawn-out process can make it difficult to compete with cash buyers.
With Constitution Lending, you don’t need to book a call with a loan officer to get a quote. You can receive a quote within seconds using our pricer. If you’d like to apply for one of these quotes, simply enter your contact information, and we’ll send you a term sheet and loan approval immediately.
We also provide access to our documents portal, allowing you to submit all required documents in one go — business entity documents, bank statements, proof of insurance, and more.
Then, we begin underwriting, have an appraiser assess the property, send over the finalized loan terms, and close the loan. We can complete all these steps within 14 to 30 days. For borrowers seeking even faster funding, we can close in as little as 7 days.
The final factor you should consider is the lender's requirements, as some may restrict the type of property you can buy or the maximum loan amount you can qualify for.
For instance, some lenders can only finance one to four-unit properties under $2 million and don't work with commercial, mixed-use, or industrial properties. Others can only issue investment property loans if you have a credit score above 760.
We recommend reviewing each lender's requirements and comparing them to your qualifications, including the type of loan, LTV, and loan amount you intend to qualify for.
Some commercial lenders may require you to submit tax returns and income verification when applying for a commercial mortgage.
We recommend avoiding these lenders, as they can complicate the process of obtaining commercial property loans. The best lenders can issue loans without requiring proof of employment or W2 forms and do not consider your debt-to-income ratio during underwriting.
Read more: DSCR Loan Requirements: 5 Key Factors Lenders Consider
Once you’ve chosen a lender, they will typically ask you to submit the following documents:
Good commercial lenders shouldn’t ask you to submit tax returns or provide proof of employment.
Many DSCR lenders will require you to set up an LLC and place ownership of the property within the LLC.
Even if your DSCR lender doesn’t request this, we still recommend creating an LLC for each property. This protects you, the real estate investor, from liability.
An LLC serves as a legal shield between your personal assets and your investment property, significantly reducing the risk of losing personal assets if your investment portfolio faces legal troubles.
For example, if someone injures themselves on your property, they can’t sue you directly because you don’t own it. Instead, they would have to pursue legal action against the LLC itself. This separation protects your personal assets and the rest of your investment portfolio from potential risks.
The final step to securing your DSCR loan is to sign the finalized property loan agreement, wire the down payment to the title company, and sign documents like the promissory note, deed of trust, and closing disclosure to complete the transfer of property ownership.
Constitution Lending has been providing reliable financing options to real estate investors looking to grow their portfolios for over 10 years. We’ve helped investors purchase single-family properties, multifamily properties, commercial properties, office buildings, and even short-term Airbnb properties.
You can use our DSCR loan pricer to receive a quote within seconds. We’ll then approve your loan and send you a term sheet immediately.
When underwriting commercial loans, such as DSCR loans, the primary factor lenders consider is how well a property can cover its monthly expenses. A better ratio between a property’s cash flow and debt obligations increases your chances of qualification. Additionally, lenders may consider your credit history to verify that you are a responsible borrower.
If you partner with the right lender, obtaining commercial loans can be much easier than securing traditional mortgage loans. This is because commercial loans, such as DSCR loans, aren’t underwritten based on your personal financial profile. Instead, lenders focus on a property’s cash flow potential and its ability to meet debt obligations. This means you don’t need to submit personal income verification or tax returns.
The different types of commercial loans include DSCR loans, SBA (Small Business Administration) loans, bridge loans, hard money loans, and construction loans.
FHA loans are government-backed loans for individuals with lower credit scores and less capital for an upfront down payment. The U.S. government created this program to improve homeownership rates by making it easier to qualify for home loans.
Balloon payments are lump sum payments made towards the end of the loan term. They allow borrowers to have lower monthly installments at the beginning of the loan term but then pay a larger amount later on.
The key difference between residential mortgages and commercial loans is that residential mortgages are typically used to purchase homes for borrowers to live in. Commercial loans are business loans used for purchasing investment properties or renovating fixer-uppers.
There are three types of SBA loans: SBA 7(a) loans, 504 loans, and microloans. Only SBA 7(a) and 504 loans can be used to purchase real estate, while microloans are mainly for small business owners looking for business financing.
| Qualification | Requirement |
|---|---|
| Minimum and maximum loan amount | $150,000 to $3,000,000 |
| Type of property | Non-owner occupied single-family, multi-family, and 5-8 unit properties |