Tag Archive for: DSCR loan

Requirements for DSCR Loans in 2023

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How has the changing landscape of real estate in 2023 affected requirements for DSCR loans? What are lenders looking at and how can you find the right deal for you?

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. 

Requirements for 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. 

 

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What are Prepay Penalties?

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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. Therefore, 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.

Read the full article here.

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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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DSCR Loans: Single-Family Units vs Multi-Units

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What is the difference in DSCR loans: single-family vs multi-units.

A DSCR loan is a product that does not rely on income from the borrower or borrowing entity. The borrower could be an individual, an LLC, or a partnership. Regardless of who is borrowing, the lender does not require their income information.

Instead, a DSCR loan depends on the income (rent) from the property.

Traditionally, DSCR loans are used for single-family properties. However, there are products available for multi-family units as well. Here are some of the similarities and differences.

Ratio Requirements for a DSCR Loan

Debt service coverage ratio is the rent divided by the expenses of a property. If the DSCR is 1, that means the income perfectly covers the expenses, breaking even.

A DSCR loan for commercial property will likely require at least a 1.2 DSCR. This would mean your income is 120% more than your expenses.

For instance, if your mortgage, interest, taxes, and insurance add up to $1,000 per month, your rent must be $1,200 per month to have a DSCR of 1.2.

Differences Between DSCR Loans in Single-Family vs Multi-Units

There are some differences between a typical DSCR and a DSCR-style product for multi-family and commercial properties.

  • Loan size. The average DSCR loan is for single-family units, duplexes, and fourplexes, usually around $300k to $400k. A DSCR loan for commercial property, however, is a larger loan – typically anywhere between $1 million to $2 million.
  • LTV. For a typical DSCR loan, you could get an LTV of 80-85%. Commercial DSCR loans max out at 75%.
  • Terms. A DSCR loan for commercial property is amortized over 30 years or interest-only, like a traditional DSCR loan. They’re only fixed for a certain period, usually five, seven, or ten years.

Read the full article here.

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How to Use a DSCR Loan for Commercial Property

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What you need to know about the DSCR loan for commercial property or multi-family.

Maybe you have the chance to buy an apartment unit. It could have 40 units, or just five. But what if you still want the simplicity of a DSCR loan?

Most of the time, DSCR loans are only available for single-family rentals – or sometimes up to fourplexes. However, there is a product very similar to a DSCR loan that can be used for commercial property and multi-family apartment buildings.

Let’s explore how these loans differ in terms and requirements from other DSCR loans.

What Is a DSCR Loan for Commercial Property?

A DSCR loan is a product that does not rely on income from the borrower or borrowing entity. The borrower could be an individual, an LLC, or a partnership.

Regardless of who is borrowing, the lender does not require their income information.

Instead, a DSCR loan depends on the income (rent) from the property. A debt service coverage ratio is the rent divided by the expenses of a property. If the DSCR is 1, that means the income perfectly covers the expenses, breaking even.

Ratio Requirements for a DSCR Loan

A DSCR loan for commercial property will likely require at least a 1.2 DSCR. This would mean your income is 120% more than your expenses.

For instance, if your mortgage, interest, taxes, and insurance add up to $1,000 per month, your rent must be $1,200 per month to have a DSCR of 1.2.

Differences Between the Types of DSCR Loans

Let’s look at the differences between a typical DSCR and a DSCR-style product that is used for multi-family and commercial properties.

  • Loan size. The average DSCR loan is for single-family units, duplexes, and fourplexes, usually around $300k to $400k. A DSCR loan for commercial property, however, is a larger loan – typically anywhere between $1 million to $2 million.
  • LTV. For a typical DSCR loan, you could get an LTV of 80-85%. Commercial DSCR loans max out at 75%.
  • Terms. A DSCR loan for commercial property can be amortized over 30 years, or it can be interest-only. But they’re only fixed for a certain period, most commonly five, seven, or ten years.

Requirements for Commercial Property DSCR Loans

There are a few unique requirements for a DSCR loan on a commercial or multi-unit property.

  • Properties that have at least $50,000 in value or more.
  • Minimum loan size starts at $1 million to $2 million.
  • Units must be at least 75 to 90% occupied.
  • DSCR of 1.2 or higher.
  • Appraise and verify rents for each property.

This style of DSCR loan is not good for buying and fixing up value-add properties. To meet all of the requirements, the property must already be stable, rented, and bringing in rent.

4 Benefits of a DSCR Loan for Commercial and Multi-Family Property

  • Portfolios

These loans not only work for commercial properties (ie, a 20-unit apartment building), but it also works for portfolios. So if you have five single-family homes you want to put under one loan, this product could also do that. The properties must appraise for $50k or higher.

  • Non-recourse

Non-recourse means you don’t have to personally sign or personally guarantee it – it all goes through your LLC. So your lender won’t come after you if something goes wrong.

  • Alternative to Banks

These DSCR-style loans are helpful while banks are tight. If you don’t want to go through the hassle of a bank (or even if you can’t qualify for a bank loan), a DSCR can be a great alternative.

  • Low Hassle

A DSCR loan won’t require your tax returns, proof of income, or any of the other paperwork that typically drags out the loan process. All you need is an LLC, a good credit score, and a qualifying property.

More on DSCR Loans

A DSCR loan could be the right fit for your single-family, multi-family, or commercial property.

Left with questions about DSCR loans? Check out these videos.

Want more info for your deal or portfolio? Reach out at Info@TheCashFlowCompany.com.

Not sure your property’s DSCR qualifies? Use this free, simple DSCR calculator.

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DSCR Loans and LLCs: Beware of This Major Roadblock

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Learn from this mistake: an important lesson about DSCR loans, LLCs, credit, and partners.

DSCR loans are a great option if you need a loan in an LLC’s name.

However, there’s a major risk to be aware of when you look for financing under your LLC’s name.

Let’s walk through what recently happened to a client whose credit score dipped… and a big secret was revealed.

Credit Usage Can Impact Your Loan Terms

This client was quoted by another company for a DSCR loan:

  • 9% interest rate
  • 3 origination points
  • On a cash-out, 70% refinance of a remodeled, rented property.

Doesn’t that seem high?

His main hurdle was that his credit score had dipped during the remodel of this project.

He started with a score of 720 and a credit limit of $35,000. To get the property rent-ready, he used $30,000 of this credit. This caused high credit usage – which dragged his credit score down to a 679.

This plummet in score cost him a couple of points in interest and origination, resulting in a much more costly refinance than he was prepared for.

How to Fix Bad Credit as a Real Estate Investor

To get his score back up, we helped him with a usage loan.

This means:

  • We gave him a private loan.
  • He used it to pay off his credit cards.
  • Paying off the credit cards lowered his usage.
  • Lower usage raised his credit score.

When usage is the reason for your low credit score, a small short-term private loan like this can be a solution.

In our client’s case, this higher credit score refreshed the refinance DSCR he was quoted to a 7.625% interest rate, with a half-point origination, on a 30-year fixed loan.

WAY better. Until he dropped a bomb on us…

DSCR Loans and LLCs

This client told us he owned the property. All the properties were his. Then we got to ordering the title…

And the property was under an LLC. No problem! DSCR loans are great with LLCs.

Then he mentioned that he has a partner. And the partner owns 40% of the LLC. And his partner’s credit score was even worse than his.

Depending on the lender, a partner has to own a certain percentage of the LLC before their credit score matters. For some, it’s a minimum of 5% ownership. For others, it’s 50%. 

In this case, at 40%, we look at the lowest credit score in the LLC to determine the loan rate and LTV.

 

Be warned: if your financing is under an LLC, you can get quoted one set of terms, but once it comes down to it, your partners’ credit scores can make the actual terms worse. Don’t let this catch you off guard.

Be careful not only with your own credit – but with the credit of everyone in the LLC.

How to Fix a DSCR Loan When Your LLCs Partner Has Bad Credit

In this client’s situation, we’re going to try another solution, but it will take much more time.

We’re going to move this partner off the LLC while we do the usage loan. Then give it a month or two until the lender can see that it’s only the client’s name, with no partner.

There are hurdles this way. But there are always ways to get through it.

Keep this in mind when you put LLCs together for real estate investing. You might want one person with great credit and one with great experience, but however you piece it together, make sure you’re upfront with your lender. Being open about the LLC at the beginning can prevent roadblocks down the road.

Help with DSCR Loans, LLCs, and Other Investor Loans

If you have any other questions on DSCRs, fix and flips, or any kind of loan in the investor world, we’re happy to help.

For more info on real estate investing, you can check out our YouTube channel. You can also reach out directly at Info@TheCashFlowCompany.com.

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What Should Your Income Look Like for a DSCR Lender?

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5 important things to know about DSCR lender income requirements.

Compared to lenders of conventional loans, any DSCR lender will have unexpected guidelines when it comes to income. The qualifications they need from you, plus the kind of income they need from your property is unlike any traditional loan.

Let’s go over 5 key points about DSCR lenders and income.

5 Things To Know About a DSCR Lender & Income

1. YOUR Income

DSCR loans are best for borrowers whose current income over the last two years doesn’t qualify for either a conventional loan or a loan from a local bank.

If your tax returns are low over the last two years, that’s where a DSCR loan might come in for your rental property.

2. Business History

Many real estate investors are new, so they don’t have two years’ worth of tax returns for their business.

With DSCR loans, the length of your business does not matter. You could have opened the LLC the morning you close on the loan. Banks need your business information because they’re lending based on you. DSCR lenders don’t because they’re lending based on the property.

3. Employment Gaps

In the same vein as the first two items, DSCR loans are great for people who just changed jobs, moved, or haven’t had a continual work history for the past two years.

A conventional bank won’t be understanding about career shifts or gaps in work. But they won’t impact your ability to get a DSCR loan.

4. Investing History

Traditional lenders can be hard on new real estate investors. They want to see past successful projects in order to trust you. DSCR loans, though more designed for investment properties, don’t care about your past real estate investing history.

5. Cash Flow on a DSCR Loan Property

To get a great DSCR loan, the rental property must cash flow. While there are some DSCR loans available for negative cash-flowing properties, you’ll only get the best rates and terms when you have positive cash flow.

Read the full article here.

Watch the video here:

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What Are the Downsides of a DSCR Loan?

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Always shop around for loans. What downsides of a DSCR loan should you look out for?

A disclaimer: you should always shop around for DSCR loans.

There is no universal underwriting for DSCR, so every lender will be a little bit different. This product is extremely segmented. So while one lender might have a deal-breaking con, another one will have all the pros you’re looking for.

That being said, let’s look at some of the potential pitfalls of a DSCR loan compared to a conventional loan.

Downsides of a DSCR Loan: Higher Interest Rate

A DSCR loan will have an interest rate somewhere between 1-3% higher than a conventional loan. Because, unlike the conventional market which is controlled by two pseudo-government agencies (Fannie and Freddie), DSCR is made up of hundreds of different investors who design these products. One lender may offer a rate of 6%, while the same client at another lender could only get 8-9%. 

 Prepayment Penalty

There are only a few states where DSCR loans don’t have prepay penalties. With a prepay penalty, there is a period (usually 3-5 years) where you must pay a fee if you want to pay off the loan. If you think you’ll want to sell or refinance the property within that time frame, DSCR might not be a cheap option for you.

For Rentals Only

DSCR loans are designed for investors with rental properties. You cannot use a DSCR loan for an owner-occupied property (aka, your personal home). These are business-based loans, so they do not follow the same standards as personal mortgages.

Credit

Since DSCR loans don’t look at your income, they do rely heavily on your credit score. Without a good score, you’ll have a hard time getting a DSCR loan (or at least one with decent rates).

Community and Loan Size

Lastly, DSCR loans aren’t ideal for smaller communities or projects. DSCR lenders typically only lend in cities with a population greater than 25,000. The lowest loan they’ll give is generally around $75,000.

How to Find DSCR Loan with the Fewest Downsides

It’s always important to shop around for the best leverage, but this is especially true for the segmented market of DSCR loans.

Not sure where to start? Reach out to us at Info@TheCashFlowCompany.com.

We work with 10-15 different DSCR wholesale companies to find the best rates, highest LTVs, and lowest credit requirements.

Read the full article here.

Watch the video here:

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The Benefits of a DSCR Loan for Investors Who Own a Rental

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How do you benefit from a DSCR loan? Why should you get one?

A DSCR loan can replace a conventional loan for real estate investors.

But what’s it all about? Let’s go over the benefits of a DSCR loan.

Benefits of a DSCR Loan vs Conventional

These loans are relatively simple:

  • There are no personal income requirements (no W-2s, tax returns, etc). Instead, it’s all based on the income and expenses of the property.
  • There are no business or experience requirements. Bank or conventional loans require a business to exist for 2 years or more before they’ll lend to you.
  • They don’t need to see your portfolio. For other loans, lenders may ask to see what other properties you’ve flipped or rented. DSCR loans only care about the rental property at hand.

DSCR loans come in all shapes and sizes (3-year, 5-year, 30-year, 40-year), with a broad variety of details depending on lenders.

What Is the “DSCR” Part?

A debt service coverage ratio loan focuses on the debt ratio of the property. Does the rent pay for the expenses?

  • Rent – The monthly income a property receives from tenants, based on comps.
  • Expenses – Despite all the expenses of a property, a DSCR loan only takes into account the mortgage payment, interest, taxes, insurance, and HOA fees.

One way to think of this ratio is: do you at least break even on this property?

To calculate a DSCR loan: Does Rent ÷ Income equal 1?

If yes, then you exactly break even. If it’s more than 1, then you have cash flow (and getting a DSCR loan will be even easier). But if this number is less than 1, the property costs more than it makes, and you’ll need a special kind of DSCR loan, likely with worse terms.

Benefits of a DSCR Loan

Let’s go over all the positives of a DSCR loan:

  • No income requirements for you – just the property.
  • It doesn’t matter how old your business is.
  • You can write everything off on your tax returns.
  • Lenders don’t consider your other properties in the underwriting.
  • You can buy in an LLC or company name.
  • They have interest-only DSCR options.
  • There is a variety of term lengths – from 3-year adjustable to 40-year fixed.
  • They can be used for short-term rentals, like Airbnb or VRBO.
  • A DSCR loan is a perfect long-term refinance loan for a flip project. It works great with BRRRR.

Read the full article here.

Watch the video here:

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What Is a DSCR Loan – and What Can You Do With It?

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When should you use – and what is – a DSCR loan?

One of the most-asked questions we get:

“What is a DSCR loan?”

Where does it fit? What can we do with it? What do we need in order to get one?

In this post, we’ll go over: what is a DSCR loan, why it’s great, and where you should never use it.

What Is a DSCR Loan?

A DSCR loan replaces a conventional loan for investors. It’s never used for owner-occupied properties.

These loans are relatively simple:

  • There are no personal income requirements (no W-2s, tax returns, etc). Instead, it’s all based on the income and expenses of the property.
  • There are no business or experience requirements. Bank or conventional loans require a business to exist for 2 years or more before they’ll lend to you.
  • They don’t need to see your portfolio. For other loans, lenders may ask to see what other properties you’ve flipped or rented. DSCR loans only care about the rental property at hand.

DSCR loans come in all shapes and sizes (3-year, 5-year, 30-year, 40-year), with a broad variety of details depending on lenders.

What Is the “DSCR” Part?

A debt service coverage ratio loan focuses on the debt ratio of the property. Does the rent pay for the expenses?

  • Rent – The monthly income a property receives from tenants, based on comps.
  • Expenses – Only mortgage payment, interest, taxes, insurance, and HOA fees. DSCR loans do not consider utilities, property management, or other expenses in this calculation.

One way to think of this ratio is: do you at least break even on this property?

To calculate a DSCR loan: Does Rent ÷ Income equal 1? If yes, you exactly break even. If it’s more than 1, then you have cash flow (and getting a DSCR loan will be even easier). But if this number is less than 1, the property costs more than it makes, and you’ll need a special kind of DSCR loan, likely with worse terms.

What Are DSCR Loans Based On?

Aside from a rental with a ratio of 1 or more, there are four main considerations in a DSCR loan:

  1. Credit Requirements – Most DSCR loans look for borrowers with a 660 credit score or above. The better your credit, the better the LTV and interest rates you’ll get. With current high interest rates, you’ll want to have a score of 700 or more to get something affordable.
  2. LTVs – The loan-to-values DSCR lenders will give vary between 75 and 85 percent. For 80-85%, you can expect higher rates or higher fees.
  3. Type of Property – DSCR loans are good for up to 8-unit properties or mixed-use. Conventional loans only go up to 4 units and are much less flexible.
  4. Location – DSCR lenders are centralized in major metropolitan areas. If you’re investing in a smaller community (population of 25,000 or less), you’ll have a tougher time getting a DSCR loan.

Benefits of a DSCR Loan

Let’s go over all the positives of a DSCR loan:

  • No income requirements for you – just the property.
  • It doesn’t matter how old your business is.
  • You can write everything off on your tax returns.
  • Lenders don’t consider your other properties in the underwriting.
  • You can buy in an LLC or company name.
  • They have interest-only DSCR options.
  • There is a variety of term lengths – from 3-year adjustable to 40-year fixed.
  • They can be used for short-term rentals, like Airbnb or VRBO.
  • A DSCR loan is a perfect long-term refinance loan for a flip project. It works great with BRRRR.

Downsides of a DSCR Loan

As a disclaimer to start: you should always shop around for DSCR loans.

There is no universal underwriting for DSCR, so every lender will be a little bit different. This product is extremely segmented. So while one lender might have a deal-breaking con, another one will have all the pros you’re looking for.

That being said, let’s look at some of the potential pitfalls of a DSCR loan compared to a conventional loan.

Interest Rate

A DSCR loan will have an interest rate somewhere between 1-3% higher than a conventional loan. Because, unlike the conventional market which is controlled by two pseudo-government agencies (Fannie and Freddie), DSCR is made up of hundreds of different investors who design these products. One lender may offer a rate of 6%, while the same client at another lender could only get 8-9%. 

 Prepayment Penalty

There are only a few states where DSCR loans don’t have prepay penalties. With a prepay penalty, there is a period (usually 3-5 years) where you must pay a fee if you want to pay off the loan. If you think you’ll want to sell or refinance the property within that time frame, DSCR might not be a cheap option for you.

For Rentals Only

DSCR loans are designed for investors with rental properties. You cannot use a DSCR loan for an owner-occupied property (aka, your personal home). These are business-based loans, so they do not follow the same standards as personal mortgages.

Credit

Since DSCR loans don’t look at your income, they do rely heavily on your credit score. Without a good score, you’ll have a hard time getting a DSCR loan (or at least one with decent rates).

Community and Loan Size

Lastly, DSCR loans aren’t ideal for smaller communities or projects. DSCR lenders typically only lend in cities with a population greater than 25,000. The lowest loan they’ll give is generally around $75,000.

How Do You Find the Right DSCR Loan

It’s always important to shop around for the best leverage, but this is especially true for the segmented market of DSCR loans.

Not sure where to start? Reach out to us at Info@TheCashFlowCompany.com.

We work with 10-15 different DSCR wholesale companies to find the best rates, highest LTVs, and lowest credit requirements.

Want to figure out if your deal works with a DSCR loan before reaching out? Check out this free DSCR calculator.

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