When Is a DSCR Loan Cheaper Than a Bridge Loan?

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.

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