Tag Archive for: LTV

HELOC Vs Cash Out Refi: Which One is Better in 2024?

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HELOC Vs Cash Out Refi: Which One is Better in 2024?

Are you thinking about tapping into your home equity to put more money into your life? If so, you might be wondering whether or not a Home Equity Line of Credit (HELOC) or a Cash-Out Refinance is the best choice for you. Both options have their perks, however one may suit your needs better than the other in 2024. Today we will discuss HELOC Vs Cash Out Refi. Let’s get started by breaking  down the differences and comparing them in order to see which option will put more money into your pocket.

What is a HELOC?

First and foremost, what is a HELOC? A HELOC is a Home Equity Line of Credit, or an equity line on your property. Therefore, it operates like a credit card and you can draw from it as needed by using your home as collateral. To clarify, you only pay interest on the amount you borrow, not on the entire line of credit. Here are some key points about HELOCs:

  • First, Low to no upfront costs: Many HELOCs have little to no initial fees if it is kept for a few years. Even if they do charge, it is normally only in the $400-$500 range.
  • Next, Flexible borrowing: You can borrow as much or as little as you need, as long as you stay within your credit limit.
  • Finally, Variable or fixed rates: Choose a rate that fits your financial plan. There are a variety of options available that can fit your needs.

What is a Cash-Out Refinance?

A Cash-Out Refinance on the other hand replaces your existing mortgage with a new, larger one. Therefore, you receive the difference in cash. This option can be helpful if you need a large sum of money and would prefer a single monthly payment. Here are some key points about a cash-Out Refinances:

  • First, Higher upfront costs: Expect to pay between $3,000 and $8,000 in closing costs.
  • Next, Fixed interest rate: Your new mortgage has a fixed rate, giving you predictable payments.
  • Finally, Longer loan term: You start a new mortgage term, which can be up to 30 years.

5 Benefits of HELOCs

Here are five reasons why a HELOC might be a better choice than a Cash-Out Refinance in 2024:

  1. Lower Costs: It often costs little to nothing to refinance into a HELOC.
  2. More Funds Available: HELOCs usually allow you to borrow a higher percentage of your home’s value compared to Cash-Out Refinances.
  3. Keep Your Low Mortgage Rate: You don’t have to refinance your existing low-rate mortgage into a higher-rate loan.
  4. Fast and Simple: HELOCs are fast and simple to set up, often with less paperwork.
  5. No Regrets: With a HELOC, you’re not committing to a new long-term, higher-rate mortgage, potentially saving you money in the long run.

Which One is Better for You?

When choosing between a HELOC and a Cash-Out Refinance it depends on your financial goals, as well as the current market conditions. Here are some scenarios to help you decide:

Choose a HELOC if:

  • Low upfront costs.
  • Flexibility in borrowing.
  • You plan to pay off the borrowed amount quickly.
  • Receive 80% to 85% LTV.
  • Interest on mortgage is 3% to 4% and will not be affected by HELOC. 
  • Less paperwork and closing in 1 to 3 weeks.

Choose a Cash-Out Refinance if:

  • You need a large sum of money all at once.
  • Fixed monthly payments.
  • Payments are included within the life of the mortgage.
  • Receive up to 75% LTV.
  • Interest on mortgage will increase to 7%.
  • More paperwork and closing in 3-4 weeks. 

Real-Life Example

Today we are going to use the numbers right from David Ramsey’s website. On his website he states that the average debt in America for real estate, car, and credit card totals $290,000. It is important however to understand that these amounts can be even higher for some people. Therefore these numbers can multiply to an even higher number of savings for you depending on your situation. 

Total Debt $290K
Current Mortgage 4%
Total Debt Payments Per Month $2,700 
Savings Goal Per Month $700 

 

Refinance: Mortgage, Car, Credit Card Into One Payment
Interest Rate 7%
Mortgage After Refinance $295K
Savings Goal Per Month $700
Cost Over the Life of the Loan $250K
Cost After Just One Year $113,000

 

HELOC: Take Your Debt and Move it into a Home Equity Line of Credit
Fixed Interest Rate 9%
Consolidate the Car and Credit Cards $57,000
Savings Goal Per Month $700
Cost Over the Life of the Loan $6,000 to $7,000

In sum, a HELOC is usually better for those who want low initial costs and flexible borrowing options. On the other hand, a Cash-Out Refinance might suit you if you need a large sum of money at once and prefer the stability of fixed payments.

Conclusion

In conclusion, a HELOC often provides more flexibility, as well as lower upfront costs than a Cash-Out Refinance will. However, your choice depends on your specific needs and financial situation. Therefore, think about your goals, how much money you need, and how quickly you plan to repay the loan. Most importantly, remember that interest rates and market conditions can change. What works best now might not be the best choice in the future. Always keep an eye on the market and consult with a financial advisor to make an informed decision.By making the right choice, you can save money, reduce stress, and improve your overall financial well-being.

Need More Information?

If you have questions or want more personalized advice, check out our website or give us a call. We’re here to help you make the best financial decision for your future.

Watch our most recent video to find out more about: HELOC Vs Cash Out Refi: Which One is Better in 2024?

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DSCR Loans: Why You Need a Good Credit Score

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DSCR Loans: Why You Need a Good Credit Score

Welcome to The Cash Flow Company! Today, we’re diving into why you need a good credit score for a DSCR loan. We’ve touched on DSCR loans before, however it’s essential to understand how your credit score fits into the picture. When you’re investing in real estate, having access to the right type of loan is crucial. Therefore, DSCR loans are a fantastic option for many investors because they focus on the income generated by the property rather than your personal income. However, in order to get the most out of a DSCR loan, you need a good credit score. This score impacts several aspects of your loan, from approval to interest rates and loan terms. Let’s break it down.

First, Why Credit Scores Matter

Your credit score is a significant factor in DSCR loans because underwriting is now mostly electronic. A computer evaluates your application, therefore your credit score heavily influences the outcome. Here’s how:

  1. Approval Rates: A better credit score means you are more likely to get approved.
  2. Interest Rates: Good credit scores often secure lower interest rates.
  3. Loan Terms: Higher credit scores can lead to better loan terms.

Second, Impact on Cash Flow

Example

Let’s look at a simple example. Suppose you are looking at a property with a loan amount of $250,000. Taxes are $150 a month, and insurance is another $150 a month.

  • Good Credit (Mid to High 700s): You might get an interest rate of 7.375%, making your monthly payments about $1,727. Including taxes and insurance, your total payment is $2,027. If your rent is $2,100, your property cash flows positively.
  • Not-So-Good Credit (Below 680): You might get a higher rate, say 8.75%. This increases your monthly payment to $1,967. Adding taxes and insurance, your total payment is $2,267. With the same rent of $2,100, your property now has negative cash flow.

Third, Easier Loan Approval

A higher credit score makes it easier to qualify for a DSCR loan. Lenders prefer borrowers with good credit because it suggests reliability and lower risk.

Example

Imagine two investors:

  • Investor A: Good credit score (750). They get approved easily and enjoy better terms.
  • Investor B: Lower credit score (650). They struggle to get approval and face higher rates and less favorable terms.

Fourth, Better Loan-to-Value (LTV)

LTV is the ratio of your loan amount to the value of the property. Your credit score affects this too.

How It Works

  • Good Credit: You might only need to put down 15-20%.
  • Poor Credit: You might have to put down 25-30%.

For a $300,000 property, this difference could mean needing an extra $30,000 upfront.

Finally, More Options and Lower Costs

When you have a good credit score, more lenders want to work with you. This competition can lead to lower costs, like reduced origination fees or better interest rates.

Example

With a high credit score, you might have multiple lenders vying for your business, which often results in better deals. Lower credit scores limit your options and can lead to higher costs.

Conclusion

In conclusion, having a good credit score is vital for securing a DSCR loan and maximizing your real estate investment potential. Not only does a high credit score make it easier to get approved for loans, but it also helps you secure better interest rates and more favorable loan terms. Consequently, this leads to improved cash flow and the ability to invest in more properties with less money down.

Watch our most recent video: DSCR Loans: Why You Need a Good Credit Score

Tools and Resources

At The Cash Flow Company, we have tools to help you. Check out our Credit Score Checklist on our website for easy tips on improving your score.

Visit The Cash Flow Company and click on “Tools” to download our Credit Score Checklist.

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Three Key Factors That Impact Your DSCR Loan

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Three Key Factors That Impact Your DSCR Loan

When you’re investing in real estate, understanding your DSCR (Debt Service Coverage Ratio) loan is crucial. These loans focus on the property’s income as opposed to your personal income, making them a unique option for many investors. However, in order to get the most out of a DSCR loan, you need to know what factors play a key role. Today we’ll break down the three main factors that impact your DSCR loan. By further understanding these factors, you can not only make smarter decisions but you can also improve your chances of success in real estate investing. So, let’s dive in and explore how your credit score, loan-to-value ratio, and property income affect your DSCR loan.

1. Credit Score

Your credit score is like your financial report card. It shows lenders how reliable you are with borrowed money. Here’s why it matters:

  • Approval Chances: A high credit score makes it easier to get your loan approved. For example, if you have a score of 750, lenders see you as low risk.
  • Interest Rates: Better scores mean lower interest rates. Consequently, lower rates reduce your monthly payments, leaving you with more cash flow.
  • Down Payments: With a high credit score, you might need to put down less money upfront. This means you can invest in more properties.

Imagine two investors. One has a credit score of 750, and the other has 650. The first investor gets a lower interest rate, pays less each month, and keeps more profit. The second investor however struggles with higher rates and lower cash flow.

2. Property Income

The income from the property is the star of the show for DSCR loans. Unlike other loans, DSCR loans focus on the property’s ability to generate income, not your personal income. Here’s why it matters:

  • Income Generation: The property must generate enough income to cover the loan payments. If it does, you’re more likely to get the loan.
  • Cash Flow: A property with strong rental income means better cash flow for you. Therefore, this ensures you can cover expenses and make a profit.
  • Investment Strategy: Properties with higher income potential are more attractive. They provide better returns and make it easier to get loans.

Consider a property that rents for $2,100 per month. If your monthly expenses are $2,027, you’re in good shape. However, if your payment is $2,267 due to a higher interest rate, the property doesn’t cover the loan, making it harder to get approved.

3. Loan-to-Value Ratio (LTV)

The Loan-to-Value ratio compares the loan amount to the property’s value. It shows how much equity you have in the property. Here’s how it works:

  • Investment Size: Lower LTV means you need to invest more money upfront. Higher LTV means you borrow more and invest less.
  • Refinancing: With a good LTV, you can refinance and pull out cash from your property. This helps you fund more deals or pay off other debts.
  • Risk Assessment: Lenders use LTV to assess risk. A lower LTV is safer for lenders, which might get you better loan terms.

For example, if you buy a $300,000 property with an 80% LTV, you borrow $240,000 and put down $60,000. But if your LTV is 70% due to a lower credit score, you borrow only $210,000 and need to put down $90,000. That extra $30,000 could have been used for other investments.

Conclusion

In summary, your credit score, property income, and LTV ratio are the three main factors that impact your DSCR loan. By focusing on these areas, you can improve your chances of loan approval, get better terms, and maximize your investments.

Ready to boost your credit score? Check out our Credit Score Checklist at The Cash Flow Company. It’s packed with tips to help you improve your score and make the most of your real estate investments. We are here to help! Contact us today to find out more about DSCR loans!

Watch our most recent video:Three Key Factors That Impact Your DSCR Loan

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Avoid These 4 Credit Score Mistakes for Your DSCR Loan

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Avoid These 4 Credit Score Mistakes for Your DSCR Loan

DSCR (Debt Service Coverage Ratio) loans are a game-changer for real estate investors. However, credit score does play a crucial role in the process. By avoiding some common credit score mistakes it can make all the difference. Let’s dive into four key credit score mistakes that you need to avoid and see how they impact your DSCR loan.

1. Cash Flow

Your credit score directly affects your loan interest rate, which in turn impacts your cash flow.

Example:

For this example we will use a loan amount of $250,000. If you have a good credit score (mid to high 700s), you might get a 30-year fixed rate at 7.375%. The monthly payment would be around $1,727. With taxes and insurance, your total payment would be $2,027. If the rent is $2,100, you have a positive cash flow.

However, if your credit score is lower (around 660), the interest rate might rise to 8.375%. This increases the monthly payment to $1,967, making your total payment $2,267. Now, your expenses exceed your rent, leading to negative cash flow. Therefore, keeping a good credit score is essential for maintaining a healthy cash flow.

2. Loan to Value (LTV)

Your credit score also affects how much you need to put down on a property, which is known as the loan to value ratio (LTV).

Example:

If you have a strong credit score, you might only need to put down 15-20% of the property’s value. For a $300,000 property, this means a down payment of $45,000 to $60,000. But with a lower credit score, your down payment requirement might increase to 25-30%, or $75,000 to $90,000. This higher down payment can limit the number of properties you can purchase and tie up more of your capital.

3. Approval

A higher credit score makes it easier to get your DSCR loan approved. Lenders view you as less risky, increasing your chances of approval.

Example:

Consider a scenario where your DSCR loan application is on the edge of approval. With a good credit score, your lower interest rate ensures your property has a positive cash flow, making it more likely for the loan to get approved. On the other hand, a lower credit score increases your interest rate, potentially leading to negative cash flow, and thus, your loan application might be rejected.

4. Options

A good credit score gives you more options. As a result, more lenders will compete for your business, which results in better loan terms.

Example:

With a high credit score, you will find multiple lenders who are eager to offer you a DSCR loan. This competition can lead to lower origination fees and better interest rates. Conversely, a lower credit score means fewer lenders will be willing to work with you, and those who do may charge higher fees and interest rates, reducing your overall profitability.

Conclusion

In conclusion, your credit score is a vital tool in real estate investing. It affects your cash flow, LTV, loan approval, and the options available to you. By avoiding these common credit score mistakes, you can make your investment journey smoother and more profitable. Always remember, maintaining a good credit score is within your control and can significantly impact your success as a real estate investor.

For additional tips and tools that will improve your credit score, visit our website at The Cash Flow Company and check out our Credit Score Checklist.

Finally, watch our most recent video to find out more about how you can:Avoid These 4 Credit Score Mistakes for Your DSCR Loan

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Real Estate Investing: Leverage Explained

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Real Estate Investing: Leverage Explained

Today we are going to discuss the importance that leverage has in real estate investing. Here at The Cash Flow Company, we see success from the money side because money is the key factor in real estate. The foundation of this business is leverage in order to build portfolios. Learn how it can play a vital role in your investments as well as provide opportunities that accelerate your success. Let’s take a closer look!

The importance of leverage.

Whether there are two properties or 10 properties, it is important to create more leverage over someone else. How can investors take care of their leverage on certain properties or on their portfolio? This can be accomplished by picking one property and focusing on paying it down quickly. In doing so, it will free up the equity in that property, and will provide you with more opportunities as well. 

Let’s look at the numbers!

5 properties

Each  Total for 5 properties
Property Value  $200K $1,000,000
LTV (loan to value) 75% $150K $750K
Equity  $50K $250K

In the world of leverage, an LTV of 75% unfortunately does not free up any equity. This is due to the fact that investors are paying down each property equally as opposed to paying a little more towards a single property. For example, if there was a deal available for $150K, you would not have enough equity available to purchase the property. Just to clarify, lenders will not lend over 75% on an investment property. How can you set yourself up for success while using the equity in your properties? The answer is by focusing on paying one property down faster. In doing so, you will in turn free up the equity Remember, those who will accelerate in this business are those who create financial flexibility. 

Contact us today! 

Use your equity to your advantage and create the leverage that you need to succeed! Do you need some guidance on where to get started? Here at The Cash Flow Company we can help you get on the path to success! Contact us today to find out more about Real Estate Investing: Leverage Explained<b>.

Watch our most recent video to learn more about Real Estate Investing: Leverage Explained</strong>

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Help! I Can’t Get a DSCR Loan Because of My Credit

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Help! I Can’t Get a DSCR Loan Because of My Credit

Many investors are struggling to get a DSCR loan because of their low credit score! However, there is a magical solution that can easily solve this problem. It is called a 911 usage loan! Here at The Cash Flow Company we help people raise their score so that they can get the loan they need. On average we see 7 out of 10 people struggle with a usage problem. How can they get back on their feet? Let’s take a closer look at how you can magically improve your credit score today!

Usage problem uncovered.

Usage loans are very common in this business because many investors have a usage problem. The usage problem is created when investors excessively use their personal credit cards or personal loans to pay for their business expenses. This will affect you everywhere you go, whether it’s a flip project or you’re applying for a DSCR loan. Here at The Cash Flow Company we deal a lot with credit score struggles, fix and flip properties, and rental properties. No matter what the project is, having good credit is the key to getting the funding you need.

Credit score struggles.

If you are above 30% usage on your credit cards, your  score  will begin to decrease. This percentage is also referred to as the credit utilization rate. Investors who come in with a 640 or a 660 credit score often need to increase their score to 700. In doing so, they will be able to get either the LTV or rate they need to create cash flow. Nowadays rates are still in the 7’s or 8’s. That is why it is so important to get the best rate you can in order to maximize both your LTV and cash flow. 

How can a private loan help your credit?

One quick way to increase your credit score is to use a 911 loan. This loan is used to pay down credit card debt by using private money. These private funds are secured with a property to ensure the repayment of the loan. Once the credit cards are taken off of the credit report and the new statements cycle, credit scores will then reflect the changes. 

Where do you get started?

The first thing that you need to do is run a simulation. We ask investors to do a simulation on MyFico, Credit Karma, or Experian to see how paying off a credit card will impact their credit score. We have seen people max out their credit cards at $3K, while others are maxed out at $175K. These maxed out credit cards are not only impacting their credit scores, but their DTI as well. To clarify, DTI stands for the debt to income ratio. 

For example: A client in Texas just went through a simulation and his credit score went up 100 points. He went from 653 to over 753 by simply paying off the credit cards that he had maxed out. 

High credit score means higher cash flow.

In the following example we are going to look at how credit scores can drastically impact your ability to qualify for a DSCR loan. Not only will a lower credit score increase your interest rate, but it will decrease the cash flow for your property as well. Remember, hurdle number one is making sure that both you and your property qualify for the loan. By taking 2 to 4 weeks to get the 911 usage loan, you will be able to not only buy the property, but you can then refinance it later on. This method also provides the opportunity for you to move over any remaining balances over to a business credit card.

Loan Type Property LTV of 80% Net Rent
DSCR $312K $250K $1,800
Credit Score Interest Rate Monthly Payment Can it Qualify?
680 8.8% $1,976 No
760 7.45% $1,740 Yes

Learn this magic trick today! 

Business credit cards are an excellent way to separate business expenses from your personal accounts. These credit cards are easy to get and work the same as personal credit cards. By moving expenses over to business credit cards, it wipes the charges off of your personal credit completely. As a result, your credit score, cash flow, and ability to qualify will all increase. 

We are here to help!

Here at The Cash Flow Company we are here to help you get on the right path. Do you need to get your credit card debt off of your personal credit report? Contact us today to find out more about usage loans and how they can set you up for long term financing. Just to clarify, the usage loan is a private loan that does not show up on your credit for 60 to 90 days and won’t affect your DTI. Now is the time to set yourself up for success! 

Watch our most recent video Help! I Can’t Get a DSCR Loan Because of My Credit to find out more.

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Why Your DSCR Loan Will Get Accepted

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Why Your DSCR Loan Will Get Accepted

Get your DSCR loan accepted today! DSCR loans are based off of LTV, which is 75% for rate and term and 80% for purchase. However, you need to calculate the break even point as well before purchasing the property. The break even point can limit how much you can get out of the property, as well as requires you put more money in at purchase. Let’s take a closer look at the numbers to see how you can get your DSCR loan accepted! 

What do you need to know before purchasing a property?

Investors use the BRRRR strategy for rental properties and creates an easy way to build a portfolio. However complications arise when refinancing the property. While investors expect to refinance out at 75% to 80%, it doesn’t always work as planned. This is due to the fact that the DSCR ratio comes into play. The DSCR ratio limits the amount that you can get out of the property. That is why it is important to know your numbers before purchasing the property or prior to refinancing. By calculating the break even point on your DSCR ratio you will create the cash flow you need to succeed.

Example: One property qualifies and one does not.

It is important to take everything into consideration to see whether or not the property qualifies. The numbers that you need to consider include taxes, property insurance, flood insurance (when applicable), and HOA (when applicable). Remember, in order to qualify for a DSCR loan the rent needs to be greater than or equal to the expenses. To demonstrate the break even point today we will compare two properties that have the same property value, loan amount, and monthly payment.

Value of the property Loan amount  Monthly payment 
$200K $150K $1,050
Property A Property B 
Taxes: $1,800 $3,600
Property insurance: $1,200 $3,600
Flood insurance: $0 $0
HOA:  $0 $0
Total $3,000 $7,200

In conclusion,

Always run the numbers prior to purchasing the property to find the break even point.  The break even point affects your ability to refinance the property later on. Keep in mind that every property will be different and every location will be different as well.

Do you have any questions or want to run through some numbers reach out to us! We are happy to work through the numbers with you to ensure that the property will be a good investment.

Watch our most recent video to find out more about Why Your DSCR Loan Will Get Accepted!

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Why You’ll Get Rejected for a DSCR Loan

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Why You’ll Get Rejected for a DSCR Loan

Today we are discussing why you’ll get rejected for a DSCR loan. DSCR loans are based off of LTV, and are 75% for rate and term and 80% for purchase. However, there is another factor that you need to take into consideration. That factor is the break even point. This amount limits how much you can get out of the property, and requires more money for the purchase. In today’s example we will be comparing and contrasting two properties to show how you can easily be rejected for a DSCR loan.

What do you need to know before purchasing a property?

Investors use the BRRRR strategy for rental properties and creates an easy way to build a portfolio. However complications arise when refinancing the property. While investors expect to refinance out at 75% to 80%, it doesn’t always work as planned. This is due to the fact that the DSCR ratio comes into play. The DSCR ratio limits the amount that you can get out of the property. That is why it is important to know your numbers before purchasing the property or prior to refinancing. By calculating the break even point on your DSCR ratio you will create the cash flow you need to succeed.

Example: One property qualifies and one does not.

It is important to take everything into consideration to see whether or not the property qualifies. The numbers that you need to consider include taxes, property insurance, flood insurance (when applicable), and HOA (when applicable). Remember, in order to qualify for a DSCR loan the rent needs to be greater than or equal to the expenses. To demonstrate the break even point today we will compare two properties that have the same property value, loan amount, and monthly payment.

 

Value of the property Loan amount  Monthly payment 
$200K $150K $1,050
Property A Property B 
Taxes: $1,800 $3,600
Property insurance: $1,200 $3,600
Flood insurance: $0 $0
HOA:  $0 $0
Total $3,000 $7,200
Monthly amount $3,000/12 months = $250 $7,200/12 months = $600
Break even point (mortgage payment + taxes and insurance) $1,050 + $250 = $1,300 $1,050 + $600 = $1,650
Rent is $1,400 a month  This property will qualify for the full $150K refinance This property will NOT qualify for $150K because the rent is less than the break even point

In this example it is clear to see that even though you qualify for the DSCR loan, the property doesn’t always qualify. This example is all based on the DSCR ratio and shows how the income and expenses compare. 

In conclusion,

It is important to run the numbers prior to purchasing the property to find the break even point.  The break even point will affect your ability to refinance the property later on. Always keep in mind that every property will be different and every location will be different as well. 

If you have any questions or want to run through some numbers reach out to us! We are happy to work through the numbers with you to ensure that the property will be a good investment. 

Watch our most recent video about Why You’ll Get Rejected for a DSCR Loan.

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DSCR Loans: What Type of Properties Qualify?

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DSCR Loans: What Type of Properties Qualify?

Today we are going to discuss DSCR loans and look at what type of properties qualify. DSCR loans are an excellent product because they can provide more flexibility than traditional lenders. Unlike Fannie and Freddie, or traditional lenders, DSCR loans do not have the same guidelines. Instead, DSCR loans are regulated by a few big investors and do not force people to fit into a computerized box. DSCR loans create an opportunity for investors to find the perfect loan to meet their needs. 

Unique properties require unique loans.

Many unique properties include ones that need a smaller loan, a rural loan, mixed use, or properties that are above 4 units.  Keep in mind that some lenders are not always able to meet your needs. Unlike traditional loans, DSCR lenders all follow different guidelines and requirements. While one will do a DSCR ratio of 1, another lender will require 1.1 to get their best rates. Your credit score also plays a role in loan approval. Some lenders will go down to a 620 credit score, while others will say that 680 is the lowest they will go. There are so many different options that are available to investors. Be sure to take your time to find the best option for you and your property.  

The lending box.

There is a lending box that 60% to 70% of investors fit into. This box requires them to have a 700 credit score, 75% LTV, and a 1 to 4 unit property. For these investors, it becomes a matter of price shopping to see which lender has the best price for their property. If you don’t fit into this box don’t worry! There are a multitude of loan options available that can provide the flexibility you need to succeed. Do you have a VRBO, Airbnb property, pad rental, or a rural property? Find the right loan and the right amount for your next investment project. Whether it’s $50K or $300K, DSCR lenders have the versatility that can open the door to endless possibilities.

We are here to help!

Are you in need of a DSCR loan for a unique property? Here at The Cash Flow Company we are happy to run through the numbers to see which loan is best for you. Most importantly, there is no need to run your credit! Don’t get stressed trying to fit into a lending box! Keep your options open and find the right DSCR lender today! 

Contact us today to find out more about DSCR loans! 

Watch our most recent video to find out more about: DSCR Loans: What Type of Properties Qualify?

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How to Calculate Your Maximum DSCR Loan Amount

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How to Calculate Your Maximum DSCR Loan Amount

Today we are going to go over how to calculate your maximum DSCR loan amount. Most DSCR loans are based off of LTV. Just to clarify, LTV is normally 75% for rate and term and 80% for purchase. However, there is another factor that you need to take into consideration. That factor is the break even point. The break even point can either limit how much you can get out of the property, or make you put more money in at purchase. Let’s take a closer look at the numbers to ensure that you can calculate your maximum DSCR loan amount prior to purchasing a property. 

What do you need to know before purchasing a property?

Many investors use the BRRRR strategy when investing in real estate properties. While this is an excellent method to use to build a portfolio, investors are often faced with issues when it comes to refinancing the property. While investors expect to refinance out at 75% to 80%, it doesn’t always work as planned. This is due to the fact that the DSCR ratio comes into play. The DSCR ratio can limit the amount that you can get out of the property. That is why it is important to know your numbers before purchasing the property or prior to refinancing. By calculating the break even point on your DSCR ratio you will be able to create the cash flow you need to succeed.

Example: Calculating how much you would qualify for. 

Value of the property is $200K

Refinance is 75% rate and term

$200K x .75 = $150K (this is the loan amount you would qualify for)

Keep in mind that this example is with a good credit score and a good rate at 75%. 

Example: Calculating monthly payment.

At 75% we are going to use a 7.5% rate.

$150K x .075 = $1,050 monthly payment (includes principal and interest)

If we have the same property in a different area, different zip code, or different state, then this property may or may not qualify for the 75% loan.

Example: One property qualifies and one does not.

It is important to take everything into consideration when determining whether or not the property qualifies. The numbers that you need to consider include taxes, property insurance, flood insurance (when applicable), and HOA (when applicable). Remember, in order to qualify would mean that the rent needs to be greater than or equal to the expenses for the property.

Property A Property B
Taxes: $1,800 $3,600
Property insurance: $1,200 $3,600
Flood insurance: $0 $0
HOA: $0 $0
Total $3,000 $7,200
Monthly amount $3,000/12 months = $250 $7,200/12 months = $600
Break even point (mortgage payment + taxes and insurance) $1,050 + $250 = $1,300 $1,050 + $600 = $1,650
Rent is $1,400 a month This property will qualify for the full $150K refinance This property will NOT qualify for $150K because the rent is less than the break even point

In this example it is clear to see that even though you qualify for the DSCR loan, the property doesn’t always qualify. This example is all based on the DSCR ratio and shows how the income and expenses compare. Keep in mind that every property will be different and every location will be different as well. 

In conclusion,

Before you purchase a property or get into BRRRR make sure that you run the numbers to determine if the property breaks even. This is done by finding out what the rents are for similar properties in the area, along with collecting quotes for the taxes and insurance on the property. In doing so, you will be able to ensure that the property is going to hit the LTV that you want when refinancing. 

If you have any questions or want to run through some numbers reach out to us! We are happy to work through the numbers with you to ensure that the property will be a good investment. 

Watch our most recent video How to Calculate Your Maximum DSCR Loan Amount to find out more!

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