Overview of DSCR Loans for Investors

Sep 19, 2024

Understanding DSCR Loans

Introduction

  • Presenter: Sean
  • Topic: Debt Service Coverage Ratio (DSCR) loans for real estate investment
  • Purpose: Explain DSCR loans and provide tips for obtaining optimal rates

What is a DSCR Loan?

  • Definition: A loan that prioritizes the property's income over personal income
  • Contrast with Conventional Loans:
    • Conventional loans require W-2s, tax returns, and are limited to 10 loans per person
    • DSCR loans focus on whether property income can cover debt service and expenses

Advantages of DSCR Loans

  • Not based on personal income, suitable for investors without full-time jobs
  • Can be obtained even if the investor owns multiple properties

Disadvantages of DSCR Loans

  • Higher interest rates compared to traditional loans (e.g., 8% vs. 6-7%)
  • Additional origination and processing fees

Where to Obtain DSCR Loans

  • Not typically available from big banks
  • Offered by many hard money lenders

Application Process

  • Required Information:
    • Name, contact, credit score, property address
    • Market rents, estimated property tax, and insurance costs
  • Process: Includes appraisal to verify property value and market rents

Eligibility Requirements

  • Savings: Sufficient to cover down payment, closing costs, and six months of PITIA (Principal, Interest, Taxes, Insurance, HOA)
  • Property Types: 1-4 unit properties, condos, townhouses; some lenders go up to 12-unit properties
  • Credit Score: Affects rates and loan leverage

Loan Limits

  • Single Family Homes: Up to 80% of purchase price
  • 2-4 Unit Properties: Up to 75%
  • Commercial Properties (5-12 Units): Up to 70%

DSCR Calculation

  • Formula: Gross market rent / PITIA
  • Target Ratio: Above 1.15 to ensure positive cash flow

Pricing and Loan Variants

  • Interest Rates: Affected by credit score and loan-to-value ratio
  • Loan Variants:
    • 30-Year Fixed Loan
    • 7-1 ARM and 5-1 ARM: Adjustable-rate mortgages with initial fixed periods

Prepayment Penalties

  • Types:
    • Points Version: Decreases over time, e.g., 3% in the first year
    • Minimum Interest: Owes interest for the entire penalty period
  • Considerations: Choose based on likelihood of early sale/refinance

Interest-Only Program

  • 10-Year Option: Only pay interest initially, converts to 20-year mortgage
  • Benefit: Improves DSCR, lowers monthly payments initially

Seasoning Requirements

  • For Cash-Out Refinance: Affects amount you can refinance within certain time frames after purchase

Tips for Optimal Rates

  1. Improve your credit score
  2. Aim for a lower loan-to-value ratio
  3. Ensure DSCR > 1.15
  4. Prefer purchase/refinance over cash-out refinance
  5. Opt for the highest prepayment penalty you can manage

Conclusion

  • Ideal For: Investors who can't qualify for conventional loans but have good credit
  • Recommendation: Consider Conventus Lending for competitive DSCR loan options

Additional Resource

  • Check out related video on how hard money loans work for quick closing on fixer-uppers