Tag Archive for: loan requirements

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

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What you need to know about DSCR loan credit score requirements.

DSCR lenders do have credit score requirements. Your credit score is a crucial factor lenders consider when evaluating your loan application.

Credit is a way to put a number to how safe it is to loan to you. We call this “creditworthiness,” and it’s based on your credit history and financial behavior.

A higher credit score can significantly improve your chances of getting a DSCR loan and securing favorable terms, such as a lower interest rate and a higher loan-to-value (LTV).

DSCR Loans and Credit Score’s Impact

Here’s how your credit score can impact your loan options:

  • A credit score of 740 or above can get you a higher LTV ratio and lower interest rate.
  • A credit score between 700 and 739 may still qualify you for a loan with competitive terms.
  • A credit score below 700 might make it more difficult to get approved for a loan, or could result in higher interest rates and lower LTVs.

For example, a 740 score may get you an LTV that is 5-10% higher than a 640 score, and an interest rate that is .5-2% lower.

How to Improve Your DSCR Loan Credit Score

If you’re applying for a DSCR loan, a credit score below 700 might not cut it. It’s a good idea to take steps to improve your credit. 

Here are some ways to do that:

  • Pay down credit card balances: Putting all renovation costs on credit cards can drag down your credit score. To avoid this, consider getting a private loan that won’t show up on your credit report to pay down your balances. A better credit score can also lead to better rates for long-term financing.
  • Use an authorized user: If you have a family member or friend with good, long-established credit, ask them to add you as an authorized user. This can help boost your credit score.
  • Pay your bills on time: Payment history is a key factor in your credit score. Make sure to pay all your bills, including credit cards and loans, on time. Consolidating your accounts can also help you stay organized and avoid missed payments.
  • Keep open credit accounts: Even if you stop using an account, as long as it has a good history, it will continue to add a little boost to your credit.

By following these tips, you can improve your credit score and increase your chances of getting approved for a DSCR loan with favorable terms.

You can also download this free credit score checklist to get your credit score where it needs to be for your DSCR loans.

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What changes to expect on LTVs for fix-and-flip loans when the Fed tightens money.

There are a couple ways raised federal interest rates impact fix-and-flips.

In about six to twelve months, the market is expected to have another shift. Prices should come down, and better properties will become available.

However, your fix-and-flip loans when the Fed tightens money also get tougher to work with. To be ready for those upcoming opportunities, here’s what you need to know about loans for fix-and-flips now.

Fix-and-Flip Loans with Tightened Money

What does it mean for real estate investors when the Fed starts tightening money? Lenders start to pull back.

Lenders want to wait to figure out what will happen with the markets. Their money isn’t returned as fast as usual because investors’ properties take longer to sell. Less money becomes available overall.

This tightening of money results in many recent changes we’ve seen in loans for fix-and-flips.

Changes in LTVs

The loan-to-cost or loan-to-ARV on properties has lowered, and appraisals are being cut. The average LTV used to be 75%. Now, most lenders have pulled back to 65-70%.

Lower LTVs mean you need to bring more money into a deal. It’ll take more out-of-pocket to actually close on a property in the current market.

With low LTVs and lenders being picky with transactions, it’s important to only take fix-and-flips you can obviously turn a profit on.

Home Value Changes

While loan-to-values are going down, credit score requirements are going up. Typically, lenders’ credit score minimums start at 620 or 640. Now, many lenders won’t take anyone with lower than a 680 or 700 score. Six months from now, that could become even tighter.

If you’ve been investing for a while, you’ll need to change how you look at leverage. For the past ten years, lenders have been seeking you. Now, you’ll have to proactively find your money. It’s more important than ever to plan your funding.

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