Tag Archive for: DSCR loans

Benefits of DSCR Loans for Multi-Unit Properties

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Here are the requirements of a DSCR loan for a multi-unit property (plus 4 benefits of 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 DSCR Loans for Commercial and Multi-Family Property

1. 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.

2. 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.

3. 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.

4. 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.

Read the full article here.

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How to Get Better DSCR Loan Interest Rates

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How our client raised their credit score to lower their DSCR loan interest rates by 30%.

A client came to us who was quoted by another company for a DSCR loan. They offered him:

  • 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. But 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.

Raising Your Credit Score to Lower DSCR Loan Interest Rates

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

This means:

  • We gave him a private loan.
  • Which he used to pay off his credit cards.
  • Paying off the credit cards lowered his usage.
  • Then the 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. They quoted him to a 7.625% interest rate, with a half-point origination, on a 30-year fixed loan.

Read the full article here.

Watch the video here:

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DSCR Loan vs Conventional Loan: 5 Main Differences

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5 key differences between a DSCR loan vs a conventional loan.

Conventional loans have a uniform underwriting process – which is usually long, detailed, and requires a lot of paperwork. DSCR loans, on the other hand, can be simpler. They’re more relaxed on income requirements, and they generally care more about the property itself than you as a borrower.

But what are some other differences between these two loan types? Let’s look at 5 ways a DSCR loan differs from a conventional loan.

1. Loan Limit

DSCR loans are great if you’ve maxed out the amount of conventional loans you can get. Conventional loans have a limit of 10 per person. Once you’ve reached that limit, you need to start looking for alternative options (like DSCR loans).

2. Credit Score

With most conventional loans in this economy, you’ll have a hard time getting any loans if your credit score is lower than 660.

With DSCR loans, the higher your credit score, the better. However, even people with lower credit scores (660 and below) have options with DSCR.

Keep in mind, a lower credit score means a more expensive loan. A more expensive loan will lower your cash flow. Lower cash flow might disqualify you for the loan.

For example, instead of a 7.5% interest rate, a poor credit score could only get you a 9.5%. A 9.5% interest rate might raise your monthly payment by $250. An extra $250 per month might put your debt ratio at 1 or below.

3. Holding a Property with a DSCR Loan vs Conventional

This is another area where DSCR loans differ from conventional loans: DSCRs come with prepayment penalties. This means if you pay them off before 3 or 5 years (whatever period is decided by the lender), then you get charged a hefty fee.

DSCR loans are best for people who want to hold the property, and not refinance or sell within the prepay period. Conventional loans have no restrictions on when you pay them off.

4. Property Condition

DSCR loans aren’t good for fix and flip properties. A DSCR property should need no work – it should be turnkey, totally ready. This means you should use a DSCR loan on either rental-ready purchases or a refinance on a completely renovated BRRRR-style rental.

Conventional loans are much the same. Your ability to use a traditional loan on a value-add property is restricted by the purchase price, fix-up price, and more.

5. Interest-Only Options

Lastly, DSCR loans are good for someone looking for interest-only payments. Banks and conventional loans don’t offer interest-only options. Doing interest-only improves your cash flow, giving you 5-10 years where you don’t have to pay any principal.

More on DSCR Loan vs Conventional Loan

Read the full article here.

Watch the video here:

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10 Things You Should Know About a DSCR Loan for Rental Property Deals

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How do you know if you’re the right type of person for a DSCR loan on a rental property?

What makes a good DSCR loan? What makes a good DSCR property?

We get hundreds of people asking these questions. While traditional loan offerings will be more or less the same from lender to lender, DSCR loans are more like the wild west. Every lender will have slightly different requirements, expectations, and terms.

But DSCR loans are an amazing option when used in the right place, on the right property, from the right borrower.

Let’s go over 10 things that will help you understand what’s right for a DSCR loan on a rental property.

What’s a DSCR Loan for a Rental Property?

Debt service coverage ratio loans are loans designed for real estate investors. They’re most often 30-year products, but some lenders will offer other types.

The debt ratio in a DSCR loan is based on two things: the property’s income and the property’s expenses (mortgage, interest, taxes, and insurance). Cash flow is a vital piece to DSCR lending.

Let’s look at 10 things to keep in mind for DSCR loans.

1. 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.

6. Loan Limit

DSCR loans are also good for people who have maxed out the amount of conventional loans they can get.

Conventional loans have a limit of 10 per person. Once you’ve reached that limit, you need to start looking for alternative options (like DSCR loans).

7. Credit Score

The higher your credit score, the better. However, even people with lower credit scores (660 and below) have options with DSCR.

Keep in mind, a lower credit score means a more expensive loan. A more expensive loan will lower your cash flow. Lower cash flow might disqualify you for the loan.

Instead of a 7.5% interest rate, a poor credit score could only get you a 9.5%.

8. Holding a Property with a DSCR Loan for 3-5 Years

This is another area where DSCR loans differ from conventional loans: DSCRs come with prepayment penalties. This means if you pay them off before 3 or 5 years (whatever period is decided by the lender), then you get charged a hefty fee.

DSCR loans are best for people who want to hold the property, and not refinance or sell within the prepay period.

9. Property Is Turnkey

DSCR loans aren’t good for fix and flip properties. A DSCR property should need no work – it should be turnkey, totally ready.

This means you should use a DSCR loan on either rental-ready purchases or a refinance on a completely renovated BRRRR-style rental.

10. Interest-Only

Lastly, DSCR loans are good for someone looking for interest-only payments. Banks and conventional loans don’t offer interest-only options.

Doing interest-only improves your cash flow, giving you 5-10 years where you don’t have to pay principal.

The Right DSCR Loan for a Rental Property

When you’re looking for cash flow, always look at all of your options before you jump into a loan.

We hope this article gives you an idea of what you should look for when you shop around.

Download this free DSCR calculator for the next time you’re shopping for rentals, and send any questions our way at Info@TheCashFlowCompany.com.

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DSCR ratio and interest rates explained

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DSCR ratio and interest rates explained

Today we are going to discuss the DSCR ratio and explain interest rates. Many investors are intimidated by DSCR loans and are unsure as to where to start. However, the main thing that you need to take into consideration is whether or not the property cash flows. This in turn will have a significant impact on the interest rates for you DSCR loan. Let’s take a closer look! 

Calculating a DSCR ratio. 

Let’s go over how to calculate DSCR quickly and understand what it means for your property. The DSCR ratio is found by comparing a property’s income to its expenses. To clarify, the property’s income is the rent that is received for the property. On the other hand, the expenses include the monthly mortgage payment, taxes, insurance, and HOA. A ratio of greater than 1 means the property is cash flowing, which is what both you and your lender want to see. Also, for a DSCR loan, the higher this ratio is, the better the terms your loan will have.

Negative DSCR Loans

Contrary to popular belief, you can still find a DSCR product for negative cash flow properties. However, these loans come at a higher interest rate.To clarify, a negative DSCR loan is used when someone gets stuck with a property they can’t sell. Under these circumstances, having very little income on the property would be better than none at all. This is why it is imperative that you have a cash flowing property from day one! By taking your time and working through the numbers, you can in turn avoid being stuck with a property that is not helping you to move forward.

Knowing your thresholds! 

There are certain thresholds when you calculate DSCR loans. When you break these thresholds, you get a better rate. And better rates mean… more cash flow! Your monthly payments will lower.Let’s go over what some of these thresholds will look like.

Property Income Property Expenses DSCR ratio  Profit  Interest Rate for DSCR
$2,000 $1,590 1.25 25% 7.25%
$1,500 $1,590 .94 9%+

Remember, anytime you can lower the rate, that’s cash flow that goes into your pocket. In this example, the difference between a negative DSCR and a 1.25 is about $220/month on your payment. Over the course of a year, that adds up to $2,600. If you have 5 rental properties, that’s $13,000/year. At 10 rental properties, it’s a $26,000 difference!

Know your numbers to get ahead! 

If real estate investing is going to be your career or retirement plan, buying properties that you know will cash flow is vital. A couple hundred bucks a month can snowball into hundreds of thousands over time.This is why it’s important to know how to calculate DSCR quickly when you’re looking at buying a new property. Never put a contract on a rental property when you’re not sure if the cash flow fits your goals.

How can you calculate a DSCR ratio quickly?

To help keep the numbers straight when you calculate DSCR, you can download our free, simple DSCR calculator at this link.

Watch our most recent video to find out more about: How to calculate a DSCR ratio

If you have any other questions about how to calculate DSCR (or how to get a DSCR loan!), send us an email at Info@TheCashFlowCompany.com.

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DSCR Loan Interest Rates: Explained

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What can you expect to pay on your DSCR loan interest rates? Here’s what it is (and why it matters).

You can still find a DSCR product for ratio 1 or negative cash flow properties.

DSCR loans have certain ratio thresholds. When you break these thresholds, your rate gets better. And better rates mean lower monthly payments. Which means… more cash flow!

Let’s go over some of these thresholds for DSCR loan interest rates.

Loans for a 1.25 DSCR

Say we have a property with $1,590 worth of monthly expenses, which we can charge a $2,000 rent on. Divide the rent by the expenses, and we get a DSCR of about 1.26.

One way of thinking about this is that the property is profiting 25% over the expenses. That’s good for the underwriter (and it’s good for you), so you’ll get a lower interest rate.

1.25 is a major threshold for DSCR lenders. In the current market at the beginning of 2022, the rate for a 1.25 DSCR is around 7.25%.

DSCR Loan Interest Rates for a 1 or Lower Ratio

If a property has negative cash flow, say 0.94, then the average interest rate would be 9+% on a DSCR loan.

For a breakeven ratio of 1, the typical interest rate right now would be more like 7.75%.

The Difference in DSCR Loan Interest Rates

Anytime you can lower the rate, that’s cash flow that goes into your pocket.

The difference between a negative DSCR and a 1.25 is about $220/month on your payment. Over the course of a year, that adds up to $2,600. If you have 5 rental properties, that’s $13,000/year. At 10 rental properties, it’s a $26,000 difference!

If real estate investing is going to be your career or retirement plan, buying properties that you know will cash flow is vital. A couple hundred bucks a month can snowball into hundreds of thousands over time.

This is why it’s important to know how to calculate DSCR quickly when you’re looking at buying a new property. Never put a contract on a rental property when you’re not sure if the cash flow fits your goals.

Read the full article here.

Watch the video here:

https://youtu.be/o5js06y–qM

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Why Are DSCR Loans Good? Top 5 Reasons Why Investors Love Them

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It’s “the easy loan.” But are DSCR loans good for your investments?

DSCR loans are becoming one of the most popular investor tools out there. 

But why are they so well-loved? Let’s go over 5 reasons investors like DSCR loans. 

Are DSCR Loans Good?

Firstly, let’s go over what a DSCR loan is.

DSCR stands for “debt service coverage ratio.” They’re a loan for rental properties that are based on the debt ratio of rent income to the property’s expenses.

These loans can be flexible and hassle-free. This makes them the go-to choice for investors financing a rental property or turning a fix-and-flip project into a rental at the last minute in bad markets.

But are DSCR loans really as good as they seem? Let’s take a closer look at 5 reasons why DSCR loans are a solid choice for investors. 

#1: You can start investing now.

DSCR loans are great for new investors. Traditional loans often require you have two years of real estate investing experience.

Because there are no experience requirements, a DSCR loan is a great opportunity to get into your first investment rental property. Don’t wait to apply for your first DSCR loan.

#2: No income requirements.

With a DSCR loan, you don’t have to have a W2 job, or show any tax returns or other income documentation.

This means DSCR loans are good for minimizing your tax liability. You can write everything off, pay the IRS as little as you want, and still get a great loan.

#3: Less paperwork.

The investor’s dream: less paperwork. Applications and approvals are simple with DSCR loans. There are no income requirements, employment verification, or any other intensive qualifications.

Not only is it less hassle to skip some paperwork – it also means the entire loan process is much faster.

#4: DSCR works for short-term rentals too.

DSCR loans don’t just work for traditional rentals, but they work for all real estate investment properties. DSCR loans are flexible and work with a variety of rental options. This includes VRBO, Airbnb, or renting out a traditional long-term property.

There are a few things to take into consideration with short-term rentals and DSCR. But it’s still a simple and often profitable loan for these types of properties.

#5: Great for BRRRRs.

Many investors wonder – are DSCR loans good for BRRRR-style properties? The answer is yes.

DSCR loans are great for the long-term, refinance loan at the end of your BRRRR project. The combination of a quick and easy loan and a structure designed for rental properties makes DSCR and BRRRR the perfect pair.

Want to find out how a DSCR loan might work with your BRRRR rental? You can download our free DSCR loan calculator here. It can help you learn your ratio and get an idea of the kind of terms your property may qualify for.

Are DSCR Loans Good for Your Property?

If you’re in the market for a loan on a rental property, you can reach out to us to help with the numbers. Send us a deal or ask us a question at Info@TheCashFlowCompany.com.

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DSCR Loan Money Requirements: Don’t Be Blindsided

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Investors think of DSCR loans as the “easy loan.” But here are 3 DSCR loan money requirements you need to know.

Sure, DSCR loans have a simpler underwriting process and criteria compared to conventional mortgages.

But there are a few key expenses you’ll need to keep in mind.

When applying for a DSCR loan, it’s important to have a solid plan in place for covering the necessary down payment, closing costs, and reserves. Here’s what you need to know about DSCR loan money requirements.

Down Payment

The down payment is the upfront payment you make when purchasing a property. This is whatever isn’t covered by your DSCR loan’s LTV.

Closing Costs

Closing costs are the fees associated with obtaining a loan, including lender fees, appraisal fees, and title insurance. These costs can vary widely, but generally range from 2-5% of the loan amount. It’s important to budget for these costs and have the funds available at closing.

Reserves: An Important DSCR Loan Money Requirement

Most importantly, DSCR loans will require reserves.

Many lenders require you to have 3-6 months’ worth of mortgage payments in reserve to protect against unexpected situations, such as a tenant vacating the property.

These funds can come from your own savings or from borrowing OPM (Other People’s Money) from a business partner, friend, or family member.

By having a solid plan in place for covering these money requirements, you can increase your chances of getting approved for a DSCR loan. Keep in mind that your lender will want to see evidence of these funds in order to approve your loan.

More on DSCR Loan Money Requirements and Other Criteria

Read the full article here.

Watch the video here:

 

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5 Steps to Get a DSCR Loan for Investors

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This loan type is an investor’s secret weapon… Here’s how to get a DSCR loan in 5 steps.

You need money to make money. But it doesn’t have to be your money.

Real estate investing is a highly leveraged game. 

DSCR loans are different from conventional loans like Fannie Mae and Freddie Mac because they have more lenient guidelines. DSCR loans can have anywhere from 30 to 100 different funding sources, and each one has their own underwriting rules. 

Every lender will have different prices, terms, and underwriting criteria. But here are 5 things you’ll definitely need to know to get a DSCR loan approval.

1. Credit Score: Understanding Your Credit

Your credit score is the main factor that lenders consider when evaluating your loan application. 

A higher credit score can get you a better loan-to-value (LTV) ratio and a lower interest rate. For example, a 740 score will get you an LTV 5-10% more than a 640 score. Your interest rate with a 740 score will be .5-2% lower than the interest rate with a 640 score.

If your credit score is below 700, you should take steps to improve it – such as paying down credit card debt and making sure all your payments are on time. 

This article offers some ideas for raising your credit score quickly. You can also download this free credit score checklist to get you where you need to be.

2. Money: Down Payments, Closing Costs, and Reserves

In addition to the down payment, you’ll need to have enough money for closing costs and reserves.

For reserves on a DSCR loan, lenders often require you to have 3-6 months’ worth of mortgage payments. This extra cash protects the lender in case your tenant unexpectedly vacates or some other unexpected situation arises.

The money doesn’t necessarily have to be yours – you can borrow OPM from a business partner, friend, or family member. To get a DSCR loan, though, your lender will want to see the funds for a down payment and reserves to approve you.

3. Know Your Numbers: Property Income and Expenses

DSCR loans are based on the property’s ability to generate income and pay for itself. So your in-flow and out-flow numbers are a major factor in whether or not you get a DSCR loan.

The minimum requirement is that the rents cover all expenses, including:

  • The mortgage payment
  • Taxes
  • Insurance
  • Any HOA fees

Expenses not considered by your lender include:

  • Property management fees
  • Utilities
  • Maintenance

If the property generates more income than expenses, you’ll get a better rate. However, if it doesn’t break even, you’ll likely end up paying a higher rate.

For example, if you show a lender your property can bring in $1,250 and your payments are only $1,000, you can get a better rate.

Know your numbers to get your DSCR loan approved.

4. Be Prepared: Gather Your Info to Get a DSCR Loan

If you want to not only get approved for a DSCR loan, but have it happen quickly, make sure you have all your documents and information ready to go.

Treat your real estate investing like a business – and like you’re a professional. If you come to a lender prepared, you get:

  • First dibs
  • Fast service
  • Better rates

Lenders want to do business with people who prove they can stay on top of their finances and paperwork. Just as you want to rent to “easy” tenants, lenders want to help investors who cause the least amount of friction.

It also benefits you to be competent and prepared so you can read the lender better. Unfortunately, not all financial institutions have your best interest in mind, so being prepared helps ensure you find the best deal.

5. Shop Around: Compare Offers from Multiple Lenders

There are many different funding sources for DSCR loans, and they all have different terms and rates. To get the best deal, it’s important to shop around and compare offers from multiple lenders.

It may benefit you to stay away from jack-of-all-trades lenders. Look for lenders who specialize in DSCR loans and have a track record of working with real estate investors. They will have the most options for you to get the DSCR loan product that best fits your specific property.

Have the money, understand where your credit is, and know the numbers for the property. Taking 20 minutes per week to stay on top of this means all the difference for your approval on a DSCR loan (and for your real estate investment career!).

How to Get the BEST DSCR Loan

These 5 steps will get you well on your way to approval for a DSCR investor loan.

Remember to focus on:

  • Improving your credit score
  • Having money for down payments and reserves
  • Knowing your numbers
  • Being prepared
  • Shopping around for the best deal. 

Leverage is king in real estate. With a little bit of effort, you can secure the financing you need to grow your real estate investment portfolio.

Send us an email at Info@TheCashFlowCompany.com. Show us a deal you’re looking at or ask any questions you still need answered.

Let’s make you the most successful investor we can.

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When Is a DSCR Loan Cheaper Than a Bridge Loan?

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Here’s how you can tell whether a DSCR loan is cheaper than a bridge loan for a flip on the market.

When a flipped house isn’t selling, many investors resort to converting the house into a rental while they wait out the market. You can use a bridge loan or DSCR loan to do this.

But how do you tell which loan you should use? What are the qualities of each one? Is the DSCR loan cheaper than a bridge loan? Here’s what you need to know.

Using a DSCR Loan to Turn a Flip Into a Rental

A DSCR loan is the perfect longer-term option if you need to switch your fix-and-flip property to a rental. 

First of all, a DSCR loan is based only on:

  • Your credit score (640-680 minimum).
  • The LTV (maximum of 80%).
  • Whether the property’s rent covers monthly expenses (including mortgage, insurance, taxes, and HOA fees).

There’s a variety of DSCR loans available – interest-only, 40-year amortization, regular 30-year, etc. Whatever loan you get, there’s an important detail to consider for all DSCR loans…

The DSCR Prepayment Penalty

The downside of a DSCR loan is the prepayment penalty.

Each loan has a term set for this penalty. If you pay off the loan before that term ends, you’re charged an exit fee. However, the fee amount does decrease each year.

As an example, one common structure for DSCR loans is a 5-year prepay penalty with a 5% fee. If you pay 4 years early, the fee goes down to 4%, 3 years, 3%, etc.

Additionally, there’s always a point where a DSCR loan, despite the prepay fee, becomes cheaper than a bridge loan.

Is a DSCR Loan Cheaper Than a Bridge Loan?

We’ve covered that the DSCR loan comes with the prepayment fee. Sounds pricey. But we also have to consider that the bridge loan will have a much higher interest rate.

Difference in Cost

If you intend to keep a property for more than 2 years, then a DSCR loan will always end up costing less, despite the fee.

But if you only want the property for 1 year or less, then the bridge loan will always be cheaper.

The gray area is the 1-2 year range. It varies with each loan, but there’s a tipping point somewhere in that timeframe where the bridge loan (with interest) becomes more expensive than a DSCR loan (with prepay fee).

Difference in Time

An underrated aspect of a DSCR loan is its built-in peace of mind. We have our educated guesses about how the market will go, but at the end of the day – things don’t always go as planned.

With a DSCR loan, if you end up needing to keep the property for 3, or even 30 years, you already have a product in place.

After one year with a bridge loan, you commit to either getting rid of the property or putting another loan (like a DSCR) in place.

Read the full article here.

Watch the video here:

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