Can I do Nomad with a bankruptcy?
Often times, the reason why someone may find themselves in the Catch Up Nomad position is because of some financial setback that happened in the past. Many times this results in a Catch Up Nomad in having a past bankruptcy.
So, the next logical question is: can someone do the Nomad model if they’ve had a past bankruptcy?
The answer is: yes, you can do the Nomad model if you’ve previously had a bankruptcy.
Loan programs vary over time such that loan programs that are available today might not be available tomorrow and loans programs that don’t exist today may be available tomorrow.
With that being said, there are loan programs, like FHA, where you can get a loan 2 years after your Chapter 7 bankruptcy has been discharged. You can get an FHA loan with 1 year of on-time payments during a Chapter 13 bankruptcy with the approval of the bankruptcy court. It is my understanding that these same rules also apply to VA loans.
For USDA loans, you’ll need to wait three years from the date of discharge of your Chapter 7. However, you can get a USDA loan with just 12 months of on-time payments on your payment plan for a Chapter 13 bankruptcy. You can also get a USDA loan a year after the Chapter 13 has been discharged.
So, you’ll be able to get your first Nomad property relatively easily after bankruptcy (your first two if you and your spouse are alternating loans). What about additional properties?
The typical loan that we recommend for Nomad is conventional financing and they happen to be a bit longer wait after a bankruptcy. How long? 4 years after a Chapter 7 discharge to be able to qualify for a loan or 2 years after a Chapter 13 discharge. If your Chapter 13 was dismissed without a discharge, you’ll need to wait 4 years from the date of the dismissal.
Now… I’ve also heard, from time to time, of special bankruptcy friendly loan programs with higher interest rates. In the right situation, I’d probably be OK with these as well.
Can I use the rental income from Nomad houses to qualify for me next Nomad home?
Yes! If you’ve got positive cash flow from previous Nomad houses that you’ve purchased you can use that extra cash flow as income to help qualify you for your next Nomad purchase.
Many (although not all) lenders will allow you to use a signed lease as income that can be used to offset the loan expenses on loans. There are restrictions and limitations to this like whether or not you have landlording experience that may come into consideration with the loan underwriter. Check with your lender early about this.
However, it is important to point out that the opposite is also true… if you have negative cash flow on a property, it will not help you qualify for the next purchase. Having negative cash flow will hurt your ability to purchase the next property.
Some Nomads have more than enough income to qualify even with this negative cash flow or without using a lease from the property you’re moving out of, but some do not.
You can talk to your lender to get a much better idea on how this applies to your specific situation or, as a quick and easy way to get a rough idea that is not specific to you, you can also plug some numbers into the Nomad Calculator Classic and look at the income required… that does take into account rent from the previous Nomad properties.
Do I need to earn more for each Nomad home that I buy?
Maybe. It really depends on the properties you’re buying.
In some cases you will need to earn more each year as you buy additional Nomad properties in year 2 on. In other cases the income you’re receiving from the previous Nomad properties you’ve purchased and are renting out will actually help you qualify for the next purchases.
So, what really determines whether you’ll need to earn more to buy more Nomad properties or less?
It is really the cash on cash return of the previous Nomad properties.
Cash on cash return is determined in part by the ratio of the price of the property you’re buying and the rent you’re receiving on the property. There are quite a few other factors as well though like interest rate and down payment as two additional examples.
The good news is that you can model how much you will need using the Real Estate Financial Planner™ software.
With this Nomad specific calculator you can estimate the cascading effects of buying properties each year and how that impacts your income requirement.
If you take time to play with the calculator you will start to see the importance of buying the right properties when utilizing the Nomad model.
Do I need to qualify for each new loan with Nomad?
Yes… just like when you buy any other home, with Nomad you will need to qualify for each new loan that you use to buy a Nomad property.
Qualification often includes talking to a Mortgage Broker and providing them with documentation to prove your income and assets and having them pull your credit.
Depending on the properties you’re buying with Nomad, it may get easier to qualify for future loans based on the income you’re receiving from the properties you’ve converted to rentals or it may become more challenging (usually in cases where you have negative cash flow).
That’s why it is so important to select properties that would make good Nomad properties when you’re purchasing.
How much do I need to make to do my first Nomad?
How much you need to make to do your first Nomad property really depends on a number of different factors. Some of those factors are:
- The price of homes that you’re planning to buy – the more expensive the home, the more you’ll need to make because you need to be able to support the payment on the property for the first year that you are living there and do not have any rent coming in.
- The amount that you put down – the less you put down the higher the monthly payment you’ll need to be able to afford.
- The interest rate that you are getting on your loan (which is partially dependent on your credit score) – the higher then interest rate, the higher your monthly payment will be so you’ll need to earn more to be able to qualify to buy the home.
- How much other debt you have – part of the qualification process uses your debt to income ratio. If you have other debts like car loans, student loans and/or credit card debt, you will reduce the amount of home loan that you can qualify for.
You can use the Real Estate Financial Planner™ software to model the property you’re buying to see how much income you might need to earn (assuming no additional debt).
How much down payment will I need to buy my first Nomad property?
The amount of money that you will need to be able to purchase your first Nomad property depends on several factors.
Here are some of them:
- First… the purchase price of the property you plan to buy. If you’re considering buying a $100,000 property you’ll generally need less than if you’re buying a $400,000 property.
- Second… the down payment of the loan program you plan to use. If you’re using the recommended 5% down payment on a $100,000 property, you’ll need about $5,000 down (plus any closing costs that you did not get covered by the seller and/or lender credits and reserves). If you’re looking closer to $300,000 with the same 5% down… it will be closer to $15,000. Using a smaller down payment loan program, it should be less.
We do model the down payment required with the Real Estate Financial Planner™ software that you can use to estimate your required down payment for each Nomad purchase.
Should I buy homes creatively?
So, you’re thinking to yourself… should I buy homes creatively to do Nomad? Maybe you should try to to find a property that you can buy on a lease option or get a little more creative and find a seller that is willing to allow you to take over payments on their loan and you can buy it subject to the existing financing. Not so fast.
The Nomad model does not, in any way, require that you even consider buying properties creatively. It is by the very nature of it having you get owner occupant loans, a traditional financing approach to real estate investing.
Will some people that have extra time, desire and skills want to supplement or tweak the traditional Nomad model to include creative financing strategies… sure. However, hear my words: you do not need to nor would I recommend that you even seek out information on how to do these types of transactions. It is a shiny object that will distract you from the prize of just doing the Nomad model as it was designed.
And for those of you that think… he’s not recommending them because he’s like a large number of other real estate agents and does not understand these strategies and the benefits of doing them… au contraire… I’ve taught a large number of classes on all of these creative strategies to real estate agents and real estate investors.
I understand both the pros and cons of each strategy better than most. My advice to you when it comes to buying creatively and Nomad: don’t worry about it… focus on just implementing the traditional financing Nomad strategy.