Most lenders won’t fund low loans for small town real estate. We do.
It’s tough to find a lender who will lend in a rural area. It can also be a struggle to get a real estate loan for lower than $75,000.
When you find a great small town real estate loan for under $75k? Double whammy.
But for the last 23 years, we’ve helped thousands and thousands of investors fund billions of dollars – and one of our specialties is small loans just like this.
Funding Small Town Loans
We help a lot of clients with small town real estate, whether they’re from those communities or just investing there. A lot of properties in these areas are available for less than $75k, so other lenders aren’t interested in funding them.
Just last month, we funded 3 properties like this. The number for each of them broke down like this:
Purchase: <$40,000
Rehab: ~$20,000
All-in: <$60,000
ARV: $100,000 – $110,000
There is a lot of money to be made on these properties, yet most lenders wouldn’t fund a deal like this.
We don’t care if a property is rural or agricultural. If the numbers make sense, our loan can be secured on a property, and there’s money to be made for you… Then we’d love to help you with small town real estate loans.
Getting a Loan for Small Town Real Estate
Have any questions about how these small loans work? Need a smaller loan like this? Reach out at Info@TheCashFlowCompany.com, and we’d love to see how we could help.
We offer real estate investing loans in Colorado, Oklahoma, Florida, parts of Texas, and other parts of the Midwest.
https://thecashflowcompany.com/wp-content/uploads/2023/03/Snappa-9.png5351033Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2023-03-20 08:00:282023-03-17 14:31:01Where to Find Small Town Real Estate Loans
Here are the top 5 small loans we fund to our clients.
Most real estate lenders won’t touch small loans. Anything less than $75,000, and you’ll find many institutions won’t even fund you.
But for the last 23 years, we’ve helped thousands and thousands of investors fund billions of dollars – and one of our specialties is small loans.
We understand the important role smaller loans play in your real estate investing career. Let’s go over 5 types of small loans you might find a need for in your investments.
1. “Finish a Project” Small Loans
The first kind of small loan we fund is what we refer to as a “finish a project” loan.
It’s exactly what it sounds like: you run out of money on a project, and you need a bit more to get it over the finish line.
We help people with:
New builds that don’t have the money to finish.
Started flips that need a few more thousand dollars to get to market.
Rentals that require more capital to get to a rentable state.
We can fund these loans without touching your first mortgage on the property.
2. Small Town Loans
We help a lot of clients from small communities, or who invest in small towns. A lot of properties in these areas are available for less than $75k, so other lenders aren’t interested in funding them.
Just last month, we funded 3 properties like this. The number for each of them broke down like this:
Purchase: <$40k
Rehab: ~$20k
All-in: <$60k
ARV: $100k – $110k
There is a lot of money to be made on properties like this, yet most lenders wouldn’t fund this deal.
We don’t care if a property is rural or agricultural. If the numbers make sense, our loan is secure, and there’s money to be made for you, then we’d love to help you with small-town loans.
3. Gap Funding
Another loan we commonly do is gap funding.
Gap funding can cover a lot of different parts of a project. Anytime there’s an expense on an investment project that your primary loan doesn’t cover, a gap loan can come in to save the day.
These loans include:
Down payment (usually 20-30%)
Rehab costs (especially if your primary lender won’t include that in your LTV)
If you don’t have (or don’t want to use) your own capital or other lines of credit, we can come in with small loans to fill in these little gaps in your project.
4. Credit Usage Loans
Another popular loan we do is an “Improve Your Credit Score” loan.
Credit usage is a common sore spot for many real estate investors’ credit scores. Maybe you use your personal credit card to fix up your properties and pay it off once your flip sells or refinances.
In the meantime, you’re using up a high percentage of your personal credit limit. This usage negatively impacts your score, which in turn wrecks your chances of getting a great loan for your next project.
Where our loans come in is:
You take out a private loan with us.
Use those funds to pay off your personal credit cards.
Your usage goes down dramatically, improving your score so you can get approved for other loans.
5. Cash Flow Loans
The last of our popular small loans are the type that creates cash flow for your budget.
If you need to make payroll, compensate a contractor, get some extra capital for more growth, or any other business expense, we can provide a loan for that.
In this case, you don’t even need to be a real estate investor. You just need to own a piece of property that we could secure the loan with.
How a Small Loan Works
All of these loans work because you use a current piece of real estate to secure it. Our primary concerns are keeping the loan safe and making you money.
We don’t worry about your credit score, income, or experience levels. As long as they’re secured, we can get you small loans.
Have questions about how these small loans work? Need a smaller loan? Reach out at Info@TheCashFlowCompany.com and we’d love to see how we could help.
https://thecashflowcompany.com/wp-content/uploads/2023/03/Mar-23-Small-Loans-Blog-Thumbnail.png6001800Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2023-03-17 14:01:182023-03-17 14:01:185 Small Loans You Can Use to Help Your Business
Private money in real estate has its pros and cons. Here’s what you gain from using it.
Private money, other people’s money, real OPM.
Aka… funding from real people, not institutions.
With real other people’s money, there is no box. You create all the terms.
Depending on the individual OPM lender, you can get small gap loans, or large loans for an entire project. Other people’s money can be short-term, long-term; down payments, carry costs; the options are limitless.
Private Money in Real Estate: The Pros
In addition to the total flexibility of other people’s money, here are some other benefits to this style of funding:
Firstly, it’s great for beginners. You don’t need experience, and you don’t need the qualifications required by most traditional lenders.
No (or limited) red tape. They won’t check your credit score, income, tax returns, or require an application.
It’s cheaper. There are almost never fees, and the interest rates are comparable to a bank’s (on the lower end for financing).
You can close quickly. You don’t have to wait for an appraisal to happen or for an application to be processed. Funding is a phone call away.
Do any deal. OPM lenders won’t have a box for you to fit in. As long as they get their return, most people could care less what type of property you invest in.
Why Would Someone Give You Private Money in Real Estate?
Is it too good to be true? Why would a random person want to give you their money?
The thing about using real other people’s money is it’s an easy win-win scenario.
People with a lot of cash are always looking for a good place to put it, but:
Most people don’t want to be in charge of their own real estate investments.
But, banks have a very low rate of return.
Also, the stock market is unpredictable. (A good source of real OPM is older individuals who are nearing retirement. Stocks give a good rate of return in the long term, but when someone plans on retiring soon, they’ll be looking for shorter-term stability).
These people are looking for you as much as you’re looking for them. It’s just a matter of attracting (and keeping!) the right people.
https://thecashflowcompany.com/wp-content/uploads/2023/03/Untitled-Design-2.jpg6281200Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2023-03-15 08:00:022023-03-08 16:06:15Why You Should Use Private Money in Real Estate
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.
https://thecashflowcompany.com/wp-content/uploads/2023/03/Untitled-Design-1.jpg6281200Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2023-03-13 08:00:092023-03-03 14:03:34What Are the Downsides of a DSCR Loan?
The pros and cons of using other people’s money in real estate investing.
When we say real private money, we’re not talking about companies who’ve just changed their name from “hard money lender” to “private money lender.”
We’re talking about real people. Actual individuals who want to lend you money on a real estate transaction. Real money that’s cheaper, easier, and faster than any funding you could get from an institution.
Let’s go over how other people’s money can be used to fund your transactions, plus the pros and cons.
How Does Other People’s Money Work?
Real private money is the ultimate flexible funding for your real estate investments. Once you have a relationship with a lender, funding a deal is as simple as calling them with a closing timeline and the amount you need.
Remember, we’re not talking about big Wall Street companies that call themselves private money lenders. These types of lenders have strict guidelines and an underwriting process. They have a box you have to fit in.
With real other people’s money, there is no box. You create all the terms.
Depending on the individual OPM lender, you can get small gap loans, or large loans for an entire project. Other people’s money can be short-term, long-term; down payments, carry costs; the options are limitless.
Benefits of Real Private Money
In addition to the total flexibility of other people’s money, here are some other benefits to this style of funding:
It’s great for beginners. You don’t need experience, and you don’t need the qualifications required by most traditional lenders.
No (or limited) red tape. They won’t check your credit score, income, tax returns, or require an application.
It’s cheaper. There are almost never fees, and the interest rates are comparable to a bank’s (on the lower end for financing).
You can close quickly. You don’t have to wait for an appraisal to happen or for an application to be processed. Funding is a phone call away.
Do any deal. OPM lenders won’t have a box for you to fit in. As long as they get their return, most people could care less what type of property you invest in.
Why Would Someone Lend You Money?
Is it too good to be true? Why would a random person want to give you their money?
The thing about using real other people’s money is it’s an easy win-win scenario.
People with a lot of cash are always looking for a good place to put it, but:
Most people don’t want to be in charge of their own real estate investments.
Banks have a very low rate of return.
The stock market is unpredictable. (A good source of real OPM is older individuals who are nearing retirement. Stocks give a good rate of return in the long term, but when someone plans on retiring soon, they’ll be looking for shorter-term stability).
These people are looking for you as much as you’re looking for them. It’s just a matter of attracting (and keeping!) the right people.
Downsides of Other People’s Money
So, what are the cons to using real private money? There are plenty of positives, but it’s wise to be aware of some potential trouble spots:
It’s harder to find lenders. You can’t walk into a bank to get this kind of money; you just have to find the right individuals. Your OPM lenders don’t necessarily have to be millionaires, but they do have to have a good chunk of free money available for you. It can take time to find these people.
Keeping OPM lenders can be difficult. It’s takes a lot of time and attention to nurture your real private money lenders. You need to keep their money secure, pay them on time, and provide them with good opportunities. It’s best to have multiple OPM lenders available to you.
Finding other people’s money means selling the people on it. People who would most benefit from being a private lender might not even know what it means. If a doctor, dentist, teacher, etc is keeping their life savings in a bank account or IRA, then they might get a better return doing private lending. However, people outside of real estate might not understand how it works. It’s your job to explain how their money gets secured and how the process works.
The funding itself may be easier, faster, and cheaper, but with private money, finding and managing a relationship with a lender can be the hard part.
Just remember that anyone with money is looking for a stable return. If you can prove you’ll provide that, funding opportunities will start rolling in.
How to Get Other People’s Money
So how does the process work once you find other people’s money?
If you need help finding, attracting, convincing, or setting up an OPM lender, let us know. For the last 15+ years, we’ve raised millions and millions of dollars through OPM. Send us an email at Info@TheCashFlowCompany.com with any questions.
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?
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.
https://thecashflowcompany.com/wp-content/uploads/2023/03/Untitled-Design.jpg6281200Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2023-03-08 08:00:192023-03-03 13:55:56The Benefits of a DSCR Loan for Investors Who Own a Rental
3 ways to use a HELOC for real estate investing & an example of how it could play out for you.
A HELOC is like a large credit card attached to a house. You can re-use and pay off these funds over and over.
Let’s go over a few details you should know about how to use a HELOC for real estate investing – plus what a 100% HELOC-funded investment might look like.
3 Ways to Use a HELOC for Real Estate Investing
There are 3 main ways investors use HELOCs to fund their real estate deals:
Funding Any Deal You Want
If you have enough equity in your house, you could make a down payment, fund the rehab, or purchase the whole property with 100% HELOC financing.
We had a recent client find a great real estate deal in Oklahoma, where property and fix-up, all in, was $49,000. With a HELOC, that becomes an easy transaction to fund by yourself. You can skip all the trouble of going to a lender.
HELOC financing is especially useful for auction properties – you can get your funding within a day, pay for the property (or at least the down payment) all yourself, and stop missing great deals that cross your path.
Gap Funding with a HELOC for Real Estate Investing
Another major use for a HELOC is gap funding. Gap funding supplies money for all the smaller things a primary loan or mortgage won’t cover.
You could take money from this line of credit, and use HELOC financing for:
Down payment
Repairs and rehab
Earnest money, if a buyer needs funds to hold a property for you
Reserves, if your primary lender requires you to have a certain dollar amount on-hand for emergencies
Carry costs, to make loan, insurance, and other payments during the rehab
Using HELOC is the cheapest way you could fund these gaps in your loan.
Put More Down on a Property
So the third way that people use HELOCs is to put more down on a property to get better loan terms and rates.
If the bank requires another 10% more than what you have, then you can take money out of the HELOC to use. This could mean the difference between getting back financing instead of hard money or private lending.
Even if the bank doesn’t require the extra 10%, the more you can put down upfront, the more you save overall in better rates and terms.
Even if your HELOC isn’t big enough to fund an entire project, it can help you save money in smaller ways like this.
Example of How You Could Use a HELOC for Real Estate Investing
Let’s say you have a HELOC of $100,000. How can you use that in a real estate deal for 100% HELOC financing?
1. Earnest Money
You find a property you want to put under contract, so you need $2,000 for earnest money.
Instead of going to a lender or putting up your own cash, you go to your bank, have them cut you either a cashier’s check or a check on your account, put it with the title, and now you have earnest money on your account.
You now have $98,000 available in your HELOC. You’re only paying interest on $2,000.
2. Down Payment & Closing Costs
Next, you need to put in a down payment and closing costs of $10,000 total. You call your bank and have them wire it to the title company from your HELOC.
You now have $88,000 still available, and you’re paying interest on $12k.
3. Rehab & Extra Costs
Now you’re doing your projects. You need to make repairs, pay the mortgage or hard money loan, and cover taxes.
You could put a bunch of money from your HELOC in your checking account up-front, draw from it monthly, or ask your bank about a debit card. All the expenses could go on this card – you just have to keep good accounting.
Let’s say you’ve spent $30,000 total on mortgage payments, paying contractors, and other costs. This means you took $42,000 total out of your HELOC.
Note: You’re not paying interest on the full $100k limit of your HELOC. You only pay interest on the amount you’ve taken out – in this case, the $42k.
4. Paying It Off
Lastly, you sell the property or refinance it as a BRRRR. You take these funds and put it back on your line of credit.
Now, you have $100,000 again to use on your next project.
https://thecashflowcompany.com/wp-content/uploads/2023/02/Snappa-4-1.png6731286Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2023-03-06 08:00:522023-02-24 16:07:15Why You’ll Love Using a HELOC for Real Estate Investing
Bad credit on real estate loans could cost you thousands over time. Here’s what you need to know.
There are multiple types of lender approaches to credit and real estate loans.
Some jack up the interest rate and leave loan fees alone, knowing you may not do the loan if you have to bring in extra funds. Other lenders keep rates low but add a lot of points. Some will add to both for bad credit.
You’ll have to talk to the lenders near you to find out what type they are. Let’s go through a couple examples and what to look for with credit and real estate loan costs.
What Costs Look Like for Bad Credit on Real Estate Loans
Here is an example of a lender who raises the interest rate and charges more points.
Firstly, the interest rate:
Secondly, here’s the additional fees based on credit score:
So with this lender, if you have a 699 credit score instead of a 740 for a fix and flip loan, then they will raise the rate by 0.5% and charge you an extra half a point.
Now, if your score drops down to 679, the rate goes even higher and the costs rise to 1 full point over your competitor with a 700 score.
How Much Does Bad Credit on a Real Estate Loan Cost You?
So let’s say we have a $300,000 loan. What does that one point difference on our credit score do if we have a 699 instead of a 700?
It costs us half a point on our rate (an extra $125 per month), plus $1,500 in closing costs ($300k x 0.5 points).
But if your score is just 21 points under 700, at 679, it will cost you $250 more per month, plus $3k in closing costs ($300k x 1 point).
Do 5 flips a year (with a 6-month turn) at a 679 score, and you would run up an extra $24k in costs over your competitors.
How to Help Your Credit for Investing
You can let your lender enjoy those funds or enjoy them yourself.
Every point counts. $24,000 a year is worth fixing your credit.
https://thecashflowcompany.com/wp-content/uploads/2023/02/Snappa-7-1.png6711288Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2023-03-05 08:00:042023-02-28 17:25:45What Bad Credit Does to Real Estate Loans’ Costs
Lenders decide your interest rate by credit score. Here’s how it shakes out…
Leverage is the lifeblood of investing… Using other people’s money (loans) to create income and wealth for you and your family.
The largest source of funding is both small and large lending institutions. One of the top (if not the top) determining factors for lenders getting you the best funding possible… is your credit score.
Let’s look behind the scenes and see how these lenders use credit scores to determine your rate.
How Lenders Decide Interest Rate by Credit Score
Full disclosure: sometimes your rate gets jacked up just because you’re working with a greedy loan officer.
However, once you’ve found a lender you trust, you can be assured they’re using an internal system that looks something like this:
These credit boxes are what the lender uses to determine the cost of a good vs not so good credit score. (If your score is too low, you more than likely will just not get a loan).
The above example is what we would see from a typical DSCR lender. A conventional lender’s would look very similar.
The negative price adjustments are not a direct change to a rate but they are added to the cost to calculate the rate. In layman’s terms: the higher the cost, the higher the rate.
From the highest score to the lowest, you would expect to see around a 1.5% increase in interest rate. So, if the best rate was 7% at a 740+ credit score, then you may expect a rate of 8.5% with a 640 score.
Example: How Interest Rates and Credit Score Changes Your Cash Flow
As an example, let’s say we need a $300,000 loan for either a purchase or refinance. The cost of our funding, depending on interest rate, would be:
At 7%, the monthly payment would be $1,996
At 8.5%, the monthly payment would be $2,306
How does that look in credit terms? A 640 score would cost you the $2,306. On the other hand, a 740 score would cost you $300 less, at $1,996.
This is a $300 difference per month in your cash flow. Aka: a bad credit score could cost you $3,600 per year in cash flow!
An investor with a great credit score and 10 properties would be paying $1 million less over the life of their loans than an investor with the same amount of properties and bad credit.
Help with Your Cash Flow
This is why investing is easier for some people and harder for others:
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:
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.
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.
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.
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.
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.
https://thecashflowcompany.com/wp-content/uploads/2023/03/Mar-23-What-is-DSCR-Blog-Thumbnail.png6001800Mike Bhttps://thecashflowcompany.com/wp-content/uploads/2022/09/The-Cash-Flow-Company-logo.pngMike B2023-03-03 13:37:062023-03-03 13:37:06What Is a DSCR Loan – and What Can You Do With It?
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