How DSCR Loans Help Real Estate Investors Buy Rentals Without Tax Returns

Bobby Caldera (00:00)
And from a real estate investor’s standpoint, the DSCR product that he’s referring to, it’s just perfect for them. mean, it’s no pay stubs, no taxes, no bank statements, well, other than down payment. ⁓

No DTI factored in it’s just a streamlined process and like a lot of these, you know folks like especially with real estate investors. They don’t want to be, you know, they don’t want to be hemmed up or caught in underwriting with, you know, having to provide additional documentation or clarifying something or verifying something two or three times potentially. They just want a smooth process. I mean, don’t we all. So yeah, it’s, literally the perfect product as far as that is concerned.

Michelle Kesil (02:11)
Hey everybody, welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil and today I’m joined by somebody I’m looking forward to chatting with, Bobby Caldera and Jack Conway of Orion Lending, helping people with non-Q financing solutions. So excited to have you both here.

Bobby Caldera (02:33)
Thank you for having us. Appreciate it.

Jack Conway (02:33)
Thank you for having us.

Michelle Kesil (02:35)
Sure. Yeah, let’s dive in. First off, for those not familiar with you and your work, can you share what your main focus is?

Bobby Caldera (02:44)
100 % so my well

Starting off, my name is Bobby ⁓ Bobby Caldera. ⁓ I am with Orion Lending ⁓ I have Jack Conway with me as well Jack Conway is my divisional vice president ⁓ we’ve worked together for years at this point and he has a little bit more insight to a different side of the business So I wanted to kind of bring him on to add that So originally I was in property management. I was doing very well I didn’t really have a reason to leave to be quite honest, but I was looking into getting my animaless license as a loan officer ⁓ so I called a buddy

who was doing non-qm and he told me don’t do that this is ⁓

January of 2021 and this is right before the market just completely shifted and went upside down and backwards and yeah all that so He told me it would be a much better idea to go to non QM Which again is commonly referred to as alternative financing so I a career switch It’s ⁓ ended up being one of the best decisions I ever made but it really shed some light on the fact that a lot of people don’t know what ⁓ Non QM truly is or how powerful it really

is in the marketplace as far as from a mortgage lending standpoint. Now Jack if you want to I guess touch up on your background before I start diving in.

Jack Conway (04:04)
⁓ Again, thank you for having us. My name is Jack Conway. I’m a divisional vice president at Orion Lending. Both Bobby and myself and a large portion of what was my team at a previous company have recently moved to Orion. I have about 10 years in management experience in the non-QM space.

Previously coming to Orion, I ran the sales division for a strictly 100 % non-QM lending shop by the name of Green Box Loans. We moved to Orion because we were very excited about their platform of non-QM as well as agency opportunities for me and my team.

Realistically, we know we’re very excited for what comes next. We’re seeing a lot of innovation on the non QM side and we’re seeing a lot of transparency being brought to the broker side. And we’re really excited to be part of that. And that said, Bobby, please go for it. Jump in.

Bobby Caldera (05:42)
Okay, so ⁓ again, the reason we wanted to touch up on non QM with you is, you there was a time in the mortgage industry where non QM felt kind of like a dirty word, so to speak, maybe Jack can attest to that. ⁓ You know, the second somebody mentioned alternative financing, bank statements, DSCR.

ITIN or anything remotely outside conventional lending people like immediately started You know pushing it back so to speak or they got weary of it and to be fair the mortgage industry did need to learn some very hard lessons But somewhere along the way the pendulum swung so aggressively towards the rigid conventional lending that you know millions of financially responsible individuals suddenly Stopped fitting inside the box.

not because they were incapable of repaying the mortgage but because modern financial life had changed ⁓ and Traditional lending didn’t evolve fast enough to keep up with it in my opinion and the modern bar were just looks dramatically different than they did 10 20 30 years ago like today we live in a world of entrepreneurs freelancers business owners real estate investors content creators consultants you name it ⁓ and just people earning income in ways conventional

Underwriting just wasn’t designed for quite frankly. I mean you can have a borrower who’s Got 500k annually owns multiple businesses substantial assets reserves strong cash flow, but on taxes It doesn’t look like they qualify for anything, you know because their CPA quite frankly did their job ⁓ And that borrower, know can sometimes look completely unqualified Meanwhile somebody with the w-2 and minimal reserves and a perfect pay stub can just slide

Right through underwriting without a single issue and that disconnect is exactly why non QM matters The numbers are proving it non QM lending has continued growing year after year With more borrowers like just to kind of put it in perspective in 2020. I mean I’ve seen there’s there’s conflicting estimates on this but just an average approximately 2 to 3 percent of Mortgage originations were non QM in 2020 2021 the rates jumped up super high and everything went through a tail

So they stated around that 2 to 3 percent but then in 2022 it picked up and it represented 4 % 2023 represented an estimated 5 % 2024 5 anywhere from see excuse me 6 to 9 percent 2025 sorry is it’s

Around eight to ten percent of the market, but I’ve seen some Reports that said it represented 20 % of the market So in just a few short years non QM evolved from just niche alternative lending Into one of just the fastest growing sectors. So it’s important that loan officers know about this and ⁓ Quite frankly investors real estate investors know about this because it’s representing a much larger portion of the market as time goes on So Jack, did you want to stop me at any point or yes,

thing you wanted to add to that?

Jack Conway (08:44)
Yeah, I mean, guess the first thing we’d really want to talk about is what is non-given realistically. Bobby had explained that it’s called alternative financing. What do we mean by that? You’re looking for anything that is a non-traditional loan, non-Fannie Mae, non-Freddie Mac, non-FHA, VA, USDA, any of these non-traditional agency type loans. So it can be a wide variety of borrowers. You have borrowers that are perhaps underserved by traditional means, low…

credit worthiness borrowers that are recently out of housing events all the way up to extremely wealthy high qualified borrowers that wouldn’t show their income in a traditional means through a standard a paper bank state loans up to 10 plus million dollars down to loans that are sub $100,000. So it’s a wide variety and all it really means that they’re non traditional loans being their non agency backed loans. That’s it. They’re privately securitized. And so what does this mean for the consumer market?

means more financing opportunities. It just means borrowers that traditionally are overlooked due to the means by which they document their income now have financing opportunities. Real estate investors now have access to what commercial investors may call a cash flow analysis product, but for residential transactions, meaning that we go in, we take a look at the rental income that would be derived from an investment property and see whether or not that income would be enough to offset the mortgage payment.

That’s how we qualify the borrower. don’t look at whether or not they earn W-2 income. We don’t look at whether or not they have tax returns to support the property. It’s based on the individual property’s ability to cash flow positively or negatively.

On top of it, you have loans for self-employed borrowers. Historically speaking, if you go to a bank, they’re going to want to see tax returns. They’re your 10.99, so on and so forth. While we all recognize that borrowers tend to maximize tax laws and loopholes as they should, everyone should be

as aggressive with their own income as they possibly can in this country. And at the same time though, it may not look like they earn as much income as in fact they do. So instead we can take a look at their bank statements and see does this borrower actually cash flow in a means which would allow them to afford their current liabilities. So these are just products that allow a greater opportunity for a larger demographic of borrowers that historically speaking are left on the sidelines. Nothing more, nothing less. These are just tools allowing loan officers and realtors to allow their borrowers to put their best foot forward.

opening greater opportunities for each and every one of us. For the borrower community, for the realtor community, for the loan officer community, for the wholesale lending community, each and every one of us are going to benefit from these more robust products. And the exciting thing is they’re evolving faster than agency loans can. We’re seeing huge innovation right and left. There was a time and place when these DSCRs, these cash flow analysis type products for residential loans.

They used to require us to go out and do a 10-07 regardless of the means by which the borrower is going to use this rental property for income purposes. Well, we’ve seen a huge expansion in the short-term rental sector, right? There was a time not that long ago when Airbnb was a new exciting thing. Now it’s commonplace. Well, we’ve evolved from just eating 10-07s. Now we could use AirDNA, which is a system that allows us to pull data, aggregate that data from short-term rental websites via AirDNA.

Airbnb,

VRBO, so on and so forth to discern whether or not this property would cashflow on a short-term rental basis. What does that mean for the consumer? It means greater opportunities. We’re based in California. As you can imagine, a lot of properties typically don’t debt service unless you put a massive amount of money down, but on a short-term rental basis, that can be completely different. You know, we’re a two hour drive away from Palm Springs, two hour drive away from the mountains, know, 40 minute drive away from certain beaches, all those

on short-term rental basis can cashflow far different than they would on a long-term basis. So this is again, it’s just more opportunities, more tools in everyone’s tool belt. And we’re really excited because this product line is becoming more and more commonplace for the borrower, for the realtor, for the loan officer. As Bobby mentioned, there was a time not too long ago when this was a very niche, obscure sector of the lending industry. And with every day it’s becoming more and more commonplace.

And I think that’s great. I believe in rising tides for each and every one of us. And I believe that the consumer market is going to greatly benefit. I think the secondary market is going to greatly benefit. We’ve already seen the execution on these loans on the back end. The performance is fantastic. These are not the loans of the days of subprime. Realistically, where you got ninja loans, you got no income nonsense going on, fraud rampant. The oversight of these loans is very strict and the investor community, I assure you, has no interest in participating.

and nonsense, they really don’t want to buy bad loans. And we’ve seen that and we’ve seen the evolution. We’ve seen what doesn’t work goes away and we’ve seen what does work not only gets expanded, but enhanced very quickly in our market until we reach a tolerance where the performance no longer meets a benefit to each and every party. So I’m just, again, I’m very excited for this product line. I’m very excited to be able to offer it to a larger demographic. And I’m excited to see it coming to a larger consumer market. It’s fantastic for each and every one.

of us.

Michelle Kesil (14:38)
Yeah, absolutely. And do you serve the whole nation?

Jack Conway (15:23)
Yes, absolutely. We are licensed in the entire United States from New York all the way to Hawaii. So again, we are serving a large, wide demographic. giving you perspective with Orion’s particular offering. We do loans from 4 million all the way down to a hundred thousand dollars. So as you can imagine, the spread is pretty substantial and the type of different credit worthinesses is also substantial. You’re looking at borrowers that maybe couldn’t qualify for an FHA loan.

coming to us, but you’re also looking at borrowers, foreign nationals that are extremely wealthy, that’s primary purpose is for them to diversify their asset portfolio. So the variance in different types of consumers we serve here is wide to say the least. On top of it, Orion does have a large portfolio of agency products. So we even sometimes take those agency loans and if they don’t work.

fall them into non-QM opportunities. Or we see that there’s a greater opportunity in a non-QM program. we’re looking at an agency line and we realize, there’d be a better product for this borrower if we were to put them on a 40 year term and add interest only, especially because the consumer believes that the rates are going to go down. Why put them in a payment that they don’t need to be in for a long term? So again, more tools for each and every one of us. So the lending industry really is evolving at rapid speed. I mean, these products are evolving on a daily basis. We’re rolling out.

a whole new set of guidelines. We’re calling it V3, which is our version three here very soon. We’re rolling out V2 already, and this is gonna be on a continuing basis. Every quarter, we’re doing a look back at what loans we’ve closed, seeing what exceptions were granted, and then seeing what worked and didn’t work on the back end. And if it did work on a common basis, we’re incorporating that into our guidelines.

So again, the sophistication of these products and the ability to evolve with an ever evolving consumer, I think it’s fantastic. You know, you’re seeing borrowers like Bobby was mentioning, you know, there was a time when there’s no way you would have been able to get financing for a social media influencer because there’s no way they would have done their taxes in a means by which that would allow them to maximize their income. Now that’s changes. Not only can we do it off bank savings, you can do it off a 12 month term, you can do it off a 24 month term, you could do it off a two month term.

and opportunities where we can do it without bank statements and take a CPA’s unaudited profit and loss and qualify the borrower in that capacity. Now, how do we offset the liability when we don’t see the bank statements? We get a larger down payment. So again, these loans are not designed to set borrowers up for failure as they were once upon a time. We are not looking at extreme balloon payments. We are not looking at ⁓ sketchy income calculations. The products as you see them today are the byproduct of a decade really.

of performance evaluation on the backend. And there were times when there were products that were brought to market that did not work on the backend. We saw the performance fail utterly. And as a result, those products, you do not see them anymore. But the products that we do see and continue to see a strong execution on, we continue to push the needle forward and see how can we continue to innovate on a day-by-day basis so that we can better serve our community, better serve our customers, and expand our wholesale presence every single day.

we’re looking at it. It’s very exciting. really, ⁓ we’re looking forward into the new technology space that we’re adding. We’re seeing innovation in AI. think it just means faster, faster and faster executions for borrowers, quicker turn times, greater opportunities for borrowers to execute on opportunities, whether they be foreclosure properties, whether it be dips in rate. mean, watching the bond market over the past week has been watching like an insane roller coaster. And there are opportunities for borrowers if they’re able to

And granted, through traditional means, that ability just doesn’t always exist for them. So non QM is here, I think, to stay for sure. I certainly hope so. But I think to stay and on top of it to expand at a very aggressive pace.

Michelle Kesil (19:17)
Yeah, amazing. And what percentage of your clients would you say are investors or like what type of investors do you help?

Jack Conway (19:25)
Sure.

There was a time when non QM was really synonymous with bank statement loans for self-employed borrowers. They were the same. Everything else was kind of a niche of a niche as it were. ⁓ But over the years, I would say that DSCR, which are those debt service products, I would say that has even surpassed the bank statement sector of non QM. So right now for at least my particular team, I would say we’re probably about 50 50 on a DSCR type products versus more

traditional non QMB at bank statements, asset depletion products, a full doc fallout from agency. But I would say that the appeal.

For the realtor, loan officer, borrower community on these DSCR loans, it’s hard to turn down. I mean, the fact that you don’t have to provide tax state or tax returns, the fact that there is no bank statement calculations, it’s a simple form. It’s a 1007 or an air DNA report, which is fairly straightforward. And that is the sum of the qualification purposes. I guess down payment and credit and housing history. But other than that, that is the sum of the ability to qualify, which is fantastic. It means that you can close these loans really

realistically.

couple of weeks, max one, two, maybe three, but there’s very little to underwrite. So from a loan officer’s perspective, these are great. You know, you get a borrower an opportunity to qualify for an investment transaction without needing to take any of their other liabilities into consideration. So it’s a great opportunity for the borrower, great opportunity for the loan officer from us as a lending perspective. My God, the overhead it saves us is tremendous. We can slam these through no problem with very little underwriting overhead, which is great.

So everyone wins, but again, you know, I’d say right now the market is pushing all sorts of unusual nuances right now. You know, you do still have very high interest rates. have property values at record high. You have inflation going up. You have the consumer getting squeezed while other consumers are killing it. You know, it’s hard to say. It’s a very unusual. ⁓

It’s a very unusual market, which I would say is offering opportunities for people and people are capitalizing all over. You know, you do have property values falling in certain areas. have condo concerns in Florida. It’s all strange across the country. Realistically, you got the market being flooded with properties in Texas and other sunbelt states, you know, so it’s all over. And as a result, we’re seeing transactions of all different shapes and sizes and types and reasons and so on and so forth.

Bobby Caldera (21:59)
And from a real estate investor’s standpoint, the DSCR product that he’s referring to, it’s just perfect for them. mean, it’s no pay stubs, no taxes, no bank statements, well, other than down payment. ⁓

No DTI factored in it’s just a streamlined process and like a lot of these, you know folks like especially with real estate investors. They don’t want to be, you know, they don’t want to be hemmed up or caught in underwriting with, you know, having to provide additional documentation or clarifying something or verifying something two or three times potentially. They just want a smooth process. I mean, don’t we all. So yeah, it’s, literally the perfect product as far as that is concerned.

And now I mean, do we have other methodologies like Jack was saying? Yes.

can qualify using bank statements, can qualify one of profit and loss by itself, asset utilization, all those things. But the DSCR product, the debt service coverage ratio is very, very much the golden child of non-QM as far as investment is concerned.

Michelle Kesil (22:59)
Amazing. Thank you for sharing all of that. And before we wrap up here, if someone wants to reach out, connect, learn more, where can people find you?

Bobby Caldera (23:08)
You can find me on LinkedIn at mortgageherobob. I also have my book coming out on Amazon non QM for people in a hurry drops next week. So yeah, 100 % you can catch me on LinkedIn or Jack.

Jack Conway (23:22)
Don’t worry, just go to Bobby. He’ll take good care of each and every one.

Bobby Caldera (23:27)
I like to talk more than he does, usually.

Michelle Kesil (23:30)
Okay, perfect. Well, I appreciate your time and your story. Thank you so much for being here.

Bobby Caldera (23:35)
Thank you, Michelle.

Michelle Kesil (23:36)
And for the listeners tuning in, you got value, make sure you’ve subscribed. We have more conversations with operators who are building real businesses and we’ll see you on the next episode.