What Are the Downsides of a DSCR Loan?
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Always shop around for loans. What downsides of a DSCR loan should you look out for?
A disclaimer: you should always shop around for DSCR loans.
There is no universal underwriting for DSCR, so every lender will be a little bit different. This product is extremely segmented. So while one lender might have a deal-breaking con, another one will have all the pros you’re looking for.
That being said, let’s look at some of the potential pitfalls of a DSCR loan compared to a conventional loan.
Downsides of a DSCR Loan: Higher Interest Rate
A DSCR loan will have an interest rate somewhere between 1-3% higher than a conventional loan. Because, unlike the conventional market which is controlled by two pseudo-government agencies (Fannie and Freddie), DSCR is made up of hundreds of different investors who design these products. One lender may offer a rate of 6%, while the same client at another lender could only get 8-9%.
Prepayment Penalty
There are only a few states where DSCR loans don’t have prepay penalties. With a prepay penalty, there is a period (usually 3-5 years) where you must pay a fee if you want to pay off the loan. If you think you’ll want to sell or refinance the property within that time frame, DSCR might not be a cheap option for you.
For Rentals Only
DSCR loans are designed for investors with rental properties. You cannot use a DSCR loan for an owner-occupied property (aka, your personal home). These are business-based loans, so they do not follow the same standards as personal mortgages.
Credit
Since DSCR loans don’t look at your income, they do rely heavily on your credit score. Without a good score, you’ll have a hard time getting a DSCR loan (or at least one with decent rates).
Community and Loan Size
Lastly, DSCR loans aren’t ideal for smaller communities or projects. DSCR lenders typically only lend in cities with a population greater than 25,000. The lowest loan they’ll give is generally around $75,000.
How to Find DSCR Loan with the Fewest Downsides
It’s always important to shop around for the best leverage, but this is especially true for the segmented market of DSCR loans.
Not sure where to start? Reach out to us at Info@TheCashFlowCompany.com.
We work with 10-15 different DSCR wholesale companies to find the best rates, highest LTVs, and lowest credit requirements.
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