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.