DSCR Prepay Penalties Explained

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What are DSCR prepay penalties and how can you navigate them?

One of the normal things you’ll come across when looking at DSCR loans are prepay penalties. Understanding how they work (and the options you have) can help you make the best choices for your project.

What are DSCR Prepays?

If you’re working with a DSCR or a non-QM investor, you’re likely going to find lenders charging prepay penalties. 

Typically, if you want to exit the loan within a certain time period—often three to five years—they’ll charge an additional exit fee. This means that if you pay off your loan early, you could run into what’s called a hard prepay. 

Understanding the Cost of Prepay Penalties

Lenders don’t care about why you’re paying off your loan early. If you pay them in full, they’re going to charge the agreed upon fee (the prepay penalty). 

For example, if you have a $100K loan with a 3% prepay penalty, you would pay them 3% of the $100K on top of the principal and any interest or other fees owed.

While this can feel frustrating, these penalties actually allow these lending institutions to keep money flowing. A prepay helps them keep interest rates stable by ensuring a consistent flow of capital.

Different Prepay Options for DSCR Loans

DSCR loans offer two standard prepay options: five-year or three-year periods. 

How does this connect to DSCR prepay penalties? 

During the initial five- or three-year period of your mortgage, you will be penalized for paying off your loan before the prepay period has elapsed. If you keep your loan past that benchmark, you will have no more prepay penalty. 

You typically will find two basic types of prepays:

  1. Straight Prepay: If you have a straight prepay, a lender may charge you a fixed percentage of the principal balance for each year, regardless of when you pay off the loan.

  2. Declining Prepay: A declining prepay is exactly what it sounds like. Each year, the prepay penalty decreases. For example, it may be 5% of the principal balance the first year, 4% the next, etc. until the prepay penalty disappears altogether.

Choosing the Right Option for You

How can you choose the right DSCR option for your project?

It’s important to look at the prepay penalties of your loan so that you can figure out what fits your particular investment. You should also take time to research the following to make sure you’re getting the best deal possible:

Think about your timeline.

Are you keeping the property long term? Do you think the market’s going to go down? All those things come into play when you’re determining what prepay is best for you. 

A good lender will walk you through the numbers and your options, but the more information you have about your timeline, the better they’ll be able to help you.

Work with a knowledgeable lender.

Make sure you pick a lender who has options. DSCR companies often specialize in loans for a specific group, so it’s possible they won’t have the perfect loan for you. 

A good lender should have at least five to ten different DSCR funders that they could match with your loan. They should be able to help you find a loan that fits your timeline, cash flow, and specific project needs. 

Consider your exit strategy.

Prepay penalties come into play when you exit your loan. 

If you know on the front end of your project that you want a DSCR loan but might not need five years to complete it, then that should be a huge consideration when configuring your DSCR. 

Prepay Cost Examples

This chart can help you understand how DSCR prepay penalties can affect the cost of your project.

In this example, we’re considering a loan of $100K from a person with a 780 credit score. 

DSCR Prepay Penalty Comparison Chart

When comparing straight vs. declining prepay options, it’s always worth considering the timeline of your project as well as whether or not interest rates are projected to drop. 

Also, always check what added fees your lender might have connected with their prepay penalties as these can vary significantly. 

How We Help

Sometimes it can be difficult to find lenders who will take the time to run through all the numbers with you. You’re welcome to contact us at Info@TheCashFlowCompany.com and we will be happy to walk you through your options.

You can also visit our website to learn more about real estate investment or to find tools such as our free and easy DSCR calculator. 

As always, we’re more than happy to look at your project and help you figure out a deal that works for you. 

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DSCR Loans for Multi-Units and Large Portfolios

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Is it possible in 2023 to find good DSCR loans for multi-units or larger portfolios?

If you’re looking for a DSCR loan for a large project such as a multi-unit or large portfolio, you’ve come to the right place.

DSCR loans have been around for a long time. In 2023, the real estate climate has experienced a few changes, and knowing how they relate to DSCR loans can help you get ahead of the game.

Changing Landscape for DSCR Loans

DSCR loans used to be most common for single-family or 1-4 unit properties. Now, in 2023 we’re seeing DSCR loans explode into multi-family, blanket loans for larger portfolios, and multi-units. 

With new options available, you need to know what to look for while remembering that all DSCR companies have specific niches. It’s important to find a lender who understands the particulars of your project.

Expanded Loans for Multi-Units

DSCR loans now cover a wider range of properties. It’s fairly easy to find options for large portfolios of more than $50 million, blanket loans for mixed-use properties, and larger multi-family units.

The range of these options provide greater flexibility when shopping around for DSCR lenders and exploring their requirements.

Flexible DSCR Loan Requirements

It’s now possible to find DSCR loan options for first time investors and investors who don’t own a primary residence. 

This opens up DSCR loan opportunities for investors who were previously more limited in their abilities to purchase investment properties.

Loans for Rural Properties and Condotels

If you’re looking to purchase rural properties, condotels, or other vacation rentals by owner (VRBO), you can now find DSCR loans for properties up to 20 acres. 

 

Read the full article here.

Watch the full video here:

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How to Fund Your Fix and Flip

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When looking to fund your fix and flip, it’s important to understand where the money comes from.

In general, the money in your bucket comes from two places: lenders and your own pocket. It’s important to know how these funds work together to fund your project.

What Does “Lender Funding” Actually Mean?

When lenders talk about funding 90% of purchase or 100% of a renovation, it sounds like they’re paying for more than they actually are.

True, they’re taking care of a huge portion of the cost (that you will pay back eventually). However, you’re still going to encounter additional costs and fees that you’ll have to pay out of pocket to complete your fix and flip.

If you’re not prepared, it stalls your project, and you might end up paying even more than you otherwise would have.

Reimbursable Fix and Flip Costs

This is a sub-category of money you’ll need for your fix and flip. You should also have extra funds in your money bucket to pay for certain projects up front. Even for costs that will be reimbursed!

Because most lenders only reimburse you for completed work, you’ll need out of pocket money to fund the first one or two draws to keep the project going. 

These can be expensive and could cost around $15,000 each. You can find more information about how to pay for these first draws in this article from Hard Money Mike.

These draws will be reimbursed eventually, but you need the funds available up front to get your fix and flip moving. This isn’t technically an out of pocket expense, but it can feel like it while you’re waiting for those first renovations to be completed.

How to Fund Out of Pocket Costs

It can be overwhelming to look at the out of pocket costs adding up for your fix and flip. You can easily expect to pay an additional $20,000 in expenses alone, and that number can rise to $50,000 if you include the funding you’ll need for draws.

It’s best to have these funds available in a savings account, but you can also use gap financing. 

It’s also important to build your credit and be smart about how you’re using credit cards. Some business credit cards let you draw beyond the cash limits. This can be helpful in covering some out of pocket expenses. 

You can also look into hard money loans. Depending on your project, different loan options could better fit your needs. Shop around on the front end to avoid delays in your fix and flip projects. You can also use our loan cost optimizer to help you find the right deal for you.

Read the full article here.
Watch the full video here:

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Exploring DSCR in 2023: New Opportunities for Real Estate Investors

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What can DSCR loans do now in 2023 that they couldn’t do last year? 

DSCR loans have been around for a long time. In 2023, the real estate climate has experienced a few changes, and knowing how they relate to DSCR loans can help you get ahead of the game.

Changing Landscape for DSCR Loans

While DSCR loans used to be for single-family or 1-4 unit properties, in 2023 we’re seeing DSCR loans explode into multi-family, blanket loans for larger portfolios, and multi-units. 

With new options available, you need to know what to look for while remembering that all DSCR companies have specific niches. It’s important to find a lender who understands the particulars of your project.

The Power of Shopping Around

While this isn’t new, shopping around is very important in 2023. With a growing number of lenders loosening their requirements, finding a lender that specializes in projects like yours can make a big difference. 

If your project is unique or you’re dissatisfied with the rate you’re offered, reach out to mortgage lenders or brokers who have the power to offer something different. 

Exploring DSCR Loan Possibilities in 2023

As a reminder, DSCR loan requirements are based exclusively on income from the property in question (not personal or business income or taxes).

This has allowed for some exciting new developments in the DSCR loan market:

Expanded Property Types:

DSCR loans now cover a wider range of properties, including large portfolios of more than $50 million, blanket loans for mixed-use properties, and larger multi-family units.

The range of these options provide greater flexibility when shopping around for DSCR lenders and exploring their requirements.

Flexible Requirements:

It’s now possible to find DSCR loan options for first time investors and investors who don’t own a primary residence. 

This opens up DSCR loan opportunities for investors who were previously more limited in their abilities to purchase investment properties.

Rural Properties and Condotels:

If you’re looking to purchase rural properties, condotels, or other vacation rentals by owner (VRBO), you can now find DSCR loans for properties up to 20 acres. 

Funding Considerations for DSCR Loans in 2023

Products change constantly, so it’s always a good idea to talk to professionals in your area, particularly when it comes to how DSCR lenders look at funding, financing limits, and credit:

  • Gift Funding Flexibility: Lenders are trending towards having looser rules around gift money. Previously, it was better to have seasoned money in your account. Now, so long as the money is there for closing and it comes from your account, you’re usually set. That said, if you have any questions about gift funding, talk to your particular lender.
  • Property Ownership Limits: A few lenders are also lifting their limits on how many properties you can finance. Previously, the majority of companies limited investors to 5-10 properties. Now, it’s fairly easy to find lenders without those restrictions.
  • Credit Influence: Although DSCR loans don’t look at your income, they still look at credit. The better the credit score, the better the loan to value ratio. Also, the higher the DSCR calculation (rent ÷ income), the better the terms.
  • Standard Interest Only Options: As always, there are interest only options. Depending on your project and the current market, these aren’t always the most helpful, but they are available. 

How to Find Your DSCR Loan in 2023

With the recent shifts in the 2023 DSCR loan market, you should be able to find a loan option that works for you so long as your project has the potential to draw income. 

We’re more than happy to help you shop around to find the best rates. 

You can visit our website to find great tools like our DSCR calculator or contact us at Info@TheCashFlowCompany.com.

Feel free to check out our YouTube channel for more information about real estate investing in 2023.

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How to Build Credit Like a Pro

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It can feel overwhelming to build credit, but these three tips and tricks can help you quickly get back on track.

1. Don’t close credit cards you’re not using. 

You can cut them up so you can’t use them anymore, but let them keep reporting. Credit bureaus see the extra available credit which helps build your score.

Earlier this week we had a client call whose usage was in the high 30s. Even though that isn’t much higher than the ideal, it still impacted his credit score and bumped him down a tier, making him pay higher rates and potentially decreasing his loan to value with major lenders.

He had other credit cards available, but he closed those accounts. By closing them, he decreased the available credit overall which made his usage percentage go up and his credit score go down.

If he had only left those credit cards open, he would have kept a much higher available credit which would have brought his usage numbers down.

2. Increase your limits to build credit.

You can also call and ask your credit card companies to increase your available credit. Since credit scores are based on the ratio of usage to available balance, raising the ceiling builds your credit.

It’s important to remember that increased limits don’t show on your credit reports until your next statements cycle. If you’re desperate to raise your score, look at when your next statement is issued to avoid panic. 

3. Protect your credit through private investments.

By finding individuals in your community who are willing to invest in you, you can build your credit through avoiding credit cards. Paying cash helps you avoid raising your usage number. 

It doesn’t take a millionaire to make this happen. Even ordinary people who have $20,000-$50,000 can make a significant difference.

You’re helping them, and they’re helping you, because they’re not going to find an 8-9% rate anywhere else. Just make sure you take care of their investment by properly securing it.

 

Read the full article here.

Watch the full video here:

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6 Things to Consider When Estimating Out of Pocket Expenses as a Real Estate Investor

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What out of pocket expenses should you expect to pay when you’re getting into the real estate investment game?

1. Initial Deposit and Closing Costs

When you sign the contract, you’ll need to put down an initial deposit. This is part of what you see in a HUD-1 settlement.

Additionally, if a lender lends 90% of the purchase price and a 100% of the rehab costs, it looks like all you have to bring in is the remaining 10% of the purchase price.

However, you should also be prepared for additional closing costs and fees. Lenders will not cover those, and you’ll need to pay out of pocket.

2. Out of Pocket Lender Costs

Lenders also have additional fees. They often charge between 1% to 2.5% of the loan amount for appraisals, credit underwriting, and other services

For example, if the total purchase cost of a property is $200,000, and a lender covers 90% of that cost, you can expect to cover the remaining 10% ($20,000). Additionally, lender fees can quickly add an extra $2,800 to $5,600 that we owe to the lender as an out of pocket cost.

3. Title Costs

On top of that, we have title costs. Title costs are typically 0.5%f to 1% of the purchase price. 

Using the same example, if you have a purchase price of $200,000, title charges will likely be an additional $1,000 to $2,000 in out of pocket costs.

4. Mortgage Tax (In Some States)

Check your area to find out about your mortgage tax rates. You won’t have to worry about this in every state, but do your research so you’re prepared.

5. Insurance Costs

Insurance often costs somewhere between $1,000 to $2,000 and needs to be paid out of pocket upfront. 

6. Out of Pocket Monthly Interest

Interest rates depend on your particular loan. To add to our earlier example ($200,000 purchase price, covered 90% and $100,000 rehab price, covered 100%), let’s say your interest rate is 12% (1% a month). 

If you have a loan for $280,000 and they’re charging you interest on the full amount, you could expect a payment of $2,800 every month. If you have it for four months, that’s $11,200 out of your pocket. 

Essentially, after we add up all of these expenses, you can expect to pay a fair amount of additional out of pocket costs that the lender won’t cover. You should also look out for HOA fees or overages that will also have to come out of your own pocket.

 

Read the full article here.
Watch the full video here:

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Fix and Flip Out of Pocket Costs Explained

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How much in out of pocket costs should you expect for your fix and flip?

For every fix and flip or investment property you buy, money is going to come from two places: lenders and your own pocket. 

We know lenders can lend up to 90% to 85% of the purchase and 100% of the rehab. But even with these big numbers, it’s important to know what out of pocket costs you’re on the hook for as a real estate investor.

What Does “Lender Funding” Actually Mean?

When lenders talk about funding 90% of purchase or 100% of a renovation, it sounds like they’re paying for more than they actually are. 

True, they’re taking care of a huge portion of the cost (that you will pay back eventually), but you’re still going to encounter additional costs and fees that you’ll have to pay out of pocket.

We’re here to explain these costs so you’re ready for them. If you’re not prepared, it stalls your project, and you might end up paying even more than you otherwise would have.

So What Are Your Out of Your Pocket Costs?

1. Initial Deposit and Closing Costs

When you sign the contract, you’ll need to put down an initial deposit. This is part of what you see in a HUD-1 settlement.

Additionally, if a lender lends 90% of the purchase price and a 100% of the rehab costs, it looks like all you have to bring in is the remaining 10% of the purchase price.

However, you should also be prepared for additional closing costs and fees. Lenders will not cover those, and you’ll need to pay out of pocket.

2. Out of Pocket Lender Costs

Lenders also have additional fees. They often charge between 1% to 2.5% of the loan amount for appraisals, credit underwriting, and other services

For example, if the total purchase cost of a property is $200,000, and a lender covers 90% of that cost, you can expect to cover the remaining 10% ($20,000). Additionally, lender fees can quickly add an extra $2,800 to $5,600 that we owe to the lender as an out of pocket cost.

3. Title Costs

On top of that, we have title costs. Title costs are typically 0.5%f to 1% of the purchase price. 

Using the same example, if you have a purchase price of $200,000, title charges will likely be an additional $1,000 to $2,000 in out of pocket costs.

4. Mortgage Tax (In Some States)

Check your area to find out about your mortgage tax rates. You won’t have to worry about this in every state, but do your research so you’re prepared.

5. Insurance Costs

Insurance often costs somewhere between $1,000 to $2,000 and needs to be paid out of pocket upfront. 

6. Out of Pocket Monthly Interest

Interest rates depend on your particular loan. To add to our earlier example ($200,000 purchase price, covered 90% and $100,000 rehab price, covered 100%), let’s say your interest rate is 12% (1% a month). 

If you have a loan for $280,000 and they’re charging you interest on the full amount, you could expect a payment of $2,800 every month. If you have it for four months, that’s $11,200 out of your pocket. 

Essentially, after we add up all of these expenses, you can expect to pay a fair amount of additional out of pocket costs that the lender won’t cover. You should also look out for HOA fees or overages that will also have to come out of your own pocket.

Reimbursable Out of Pocket Costs

You should also have extra funds in your money bucket to pay for certain projects up front. 

Most lenders only reimburse you for completed work, and you’ll need out of pocket money to fund the first one or two draws to keep the project going. 

These can be expensive and could cost around $15,000 each. You can find more information about how to pay for these first draws in this article from Hard Money Mike.

These draws will be reimbursed eventually, but you need the funds available up front to get the project moving. This isn’t technically an out of pocket expense, but it can feel like it while you’re waiting for those first projects to be completed.

How to Fund Out of Pocket Costs

It can be overwhelming to look at the out of pocket costs adding up. You can easily expect to pay an additional $20,000 in expenses alone, and that number can rise to $50,000 if you include the funding you’ll need for draws.

It’s best to have these funds available in a savings account, but you can also use gap financing. 

It’s also important to build your credit and be smart about how you’re using credit cards. Some business credit cards let you draw beyond the cash limits. This can be helpful in covering some out of pocket expenses. 

You can also look into hard money loans. Depending on your project, different loan options can be a better fit. Shop around on the front end to make sure your projects won’t be delayed. You can also use our loan cost optimizer to help you find the right deal for you.

If you have a deal you’d like us to price out, we’d be glad to help. Just reach out to us at Info@TheCashFlowCompany.com. 

If you want more information about real estate investing in general, check out our YouTube channel.

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Credit Scores Explained

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Credit scores and loans

Understanding credit scores is critical in your journey as a real estate investor.

Lower credit scores mean you might not get a loan you’re applying for. Or you might have to put more money into a deal. If you have a bad credit score, you’ll typically see higher rates or terms which make dealing with the market frustrating. 

If you’re a real estate investor or even business owner, it’s okay to use your personal credit for your business. But it’s absolutely critical for you to understand how credit scores work.

Using personal credit works, but you want to be careful not to run it up to where you’re handicapped with higher rates. Higher rates quickly turn into higher down payments and costs overall. 

You want to build your credit score so it works for you instead of against you.

How Credit Scores Work

Credit card usage is the leading reason we see for low credit scores.

Surprisingly, the amount owed doesn’t affect the score nearly as much as the ratio of usage compared to the available balance.

For example, if two people owe $1,000 on their credit cards, you might expect similar credit scores since they owe the same amount. But that isn’t how it works!

Their FICO credit score will reflect the difference in their credit limits. 

Here’s how it works:

Let’s say Person A has a credit limit of $2,000, resulting in a 50% credit usage ($1,000 owed divided by $2,000 credit limit). In contrast, Person B owes $1,000 but has a credit limit of $5,000. Person B then has only a 20% credit usage ($1,000 owed divided by $5,000 credit limit). 

FICO and other credit-rating agencies consider credit usage ratios when determining credit scores. They want you to use your credit cards, but not too much. Therefore, FICO will typically raise your score when you have usage between 20%-30%. 

This can get complicated, and we recommend moving everything to a business credit card. Keeping your personal credit score separate from your official investing credit can save significant stress if your personal score dips.

If you do choose to continue using your personal credit for your business, it’s important to make sure you understand how usage affects your score.

Read the full article here.

Watch the full video here:

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How to Fix High Credit Usage as a Real Estate Investor

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Avoid the investor bad credit cycle and fix high credit usage using these two simple tricks.

High personal credit card usage → Bad credit score → No loan (or a loan with unfavorable terms) → No or less cash out to pay off the cards → Difficulty getting a loan for the next project

What does this cycle start with?

High usage on personal credit cards.

So, there are two solutions we recommend: 1) fixing the high usage, and 2) not using personal credit cards. Here’s how to do both.

Fix High Credit Usage with a Usage Loan

We had a client who racked up $40,000 on his personal credit cards on the fix-up of a rental property. Since it’s on his personal cards, that high usage reports on his personal credit. To fix this, we gave him a $40,000 usage loan (one that does not report on his credit).

The $40k loan from us is secured by another piece of property, or he could have gotten a loan from a friend or family member that also wouldn’t report.

He uses the loan to pay down all the credit cards. Because usage makes up 30% of your credit score, lowering your usage will likely improve your score within 30 to 60 days.

Once our client has used the loan in this way, his score went from 680 back up to 720. He can get the DSCR loan with a half point rather than 3 points, saving him thousands of dollars on the transaction.

Business Credit Cards for Real Estate Costs

The usage loan is the fix-it-quick solution. The long-term solution for this bad credit cycle is to use a business credit card for all costs associated with your real estate investing career.

The only difference between a business and a personal card is that it’s in your business’s LLC, and it doesn’t report to your personal credit.

So going forward, as our client uses his cards for future projects, it won’t affect his personal credit score or future financing, since he’ll now use his business cards.

Be aware that you’re getting the right business credit card. Some still report to personal credit, like Capital One.

Read the full article here.

Watch the video here:

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Understand and Build Your Credit Score

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How can you build your credit to help you win in the real estate market? 

Your credit score affects everything in your journey as a real estate investor. Without the leverage of a good credit score, you’ll be stuck behind the big players of Wall Street.

Why is Building Credit so Important for Real Estate Investment?

Lower scores mean you might not get a loan, or you might have to put more money into a deal. Often, you’ll see higher rates or terms which make dealing with the market frustrating. 

So if you’re a real estate investor or even business owner, and you’re using your personal credit for your business, you need to understand how to build your credit to take you to the next level.

Using your personal credit works, but you want to be careful not to run it up to where you’re handicapped with higher rates. Higher rates quickly turn into higher down payments and costs overall. 

You want to build your credit so it works for you instead of against you.

How Credit Scores Work

Credit card usage is the leading reason we see for low credit scores.

Surprisingly, it’s not the amount owed on credit cards that matters most; it’s the usage compared to the available balance. 

For example, if two people both owe $1,000 on their credit cards, you might expect their credit scores to be equally impacted since they owe the same amount. But that isn’t how it works!

Their FICO credit score will reflect the difference in their credit limits. 

Here’s how it works:

Let’s say Person A has a credit limit of $2,000, resulting in a 50% credit usage ($1,000 owed divided by $2,000 credit limit). In contrast, Person B owes $1,000 but has a credit limit of $5,000. Person B then has only a 20% credit usage ($1,000 owed divided by $5,000 credit limit). 

FICO and other credit-rating agencies consider credit usage ratios when determining credit scores. They want you to use your credit cards, but not too much. Therefore, FICO will typically raise your score when you have usage between 20%-30%. 

This can get complicated, and we recommend moving everything to a business credit card. Keeping your personal credit score separate from your official investing credit can save significant stress if your personal score takes a dip.

How to Build Credit

1. Don’t close credit cards you’re not using. 

You can cut them up so you can’t use them anymore, but let them keep reporting. Credit bureaus see the extra available credit which helps build your score.

Earlier this week we had a client call whose usage was in the high 30s. Even though that isn’t much higher than the ideal, it still impacted his credit score and bumped him down a tier, making him pay higher rates and potentially decreasing his loan to value with major lenders.

He had other credit cards available, but he closed those accounts. By closing them, he decreased the available credit overall which made his usage percentage go up and his credit score go down.

If he had only left those credit cards open, he would have kept a much higher available credit which would have brought his usage numbers down.

2. Increase your limits to build your credit.

You can also call and ask your credit card companies to increase your available credit. Since credit scores are based on the ratio of usage to available balance, raising the ceiling builds your credit.

It’s important to remember that increased limits don’t show on your credit reports until your next statements cycle. If you’re desperate to raise your score, look at when your next statement is issued to avoid panic. 

3. Protect your credit through private investments.

By finding individuals in your community who are willing to invest in you, you can build your credit through avoiding credit cards. Paying cash helps you avoid raising your usage number. 

It doesn’t take a millionaire to make this happen. Even ordinary people who have $20,000-$50,000 can make a significant difference.

You’re helping them, and they’re helping you, because they’re not going to find an 8-9% rate anywhere else. Just make sure you take care of their investment by properly securing it.

How We Help

Our goal is to make real estate investing easier, faster, and cheaper for everyone!

If you have questions about how to build your credit, we’d be glad to help. Just reach out to us at Info@TheCashFlowCompany.com. 

Want more information about real estate investing in general? Check out our YouTube channel.

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