DSCR loan are a useful option for financing your real estate investment transactions. Real estate investing has intrigued many people throughout the years for its quick potential to generate a positive cash flow. When researching how to go about financing those investment ventures, you may be wondering what options are available to you. No two clients are the same, which is why unique options like these exist. Before diving into the benefits that this can offer, it is important to understand the basics of such a program…
Debt Service Coverage Ratio
DSCR Loans, or debt service coverage ratio, is calculated by lenders when qualifying a borrower. When calculated, it is a measurement tool that lets the lender know if the investment at hand will generate enough cash flow to, at minimum, cover the proposed debt amount. A DSCR ratio above 1.0 indicates that the investment generates enough cash flow to cover the proposed debt obligation. A 1.0 is sometimes referred to as a breakeven point. A DSCR ratio below 1.0 indicates that the investment does not generate enough cash flow to cover the proposed debt obligation. In short, the higher the ratio, the less risky the loan is viewed from lending, and an investing, perspective. Some lenders may have ratio requirements that the investment property must meet, but this is a great calculation to understand when you are on the hunt for which property looks best to add to your investment portfolio.
A good DSCR loan program will have a positive ratio of 1. This means the mortgage liability and all monthly expenses are equal to the proposed rents of the subject property.
Another key factor to think about is the pre payment penalty which can me none up to 5 years. The longer the pre payment penalty, the lower the interest rate. The pre payment penalty can be anywhere from 6 months of interest payments, to up to 20% of the unpaid balance.
Be mindful and always ask upfront on any pre payment penalties with your lender or broker.
How are the DSCR loans ratios calculated?
Calculations of this ratio may vary from lender to lender, but this is a general guideline. In order to calculate DSCR, the following formula is used: u003cstrongu003eNet Operating Income (NOI)/Debt Obligationsu003c/strongu003e. As an example, Mr. Smith is looking at an investment property that has a NOI of $40,000 and an annual debt of $32,000. The DSCR in this example is 1.25. This means that Mr. Smith’s property generates 25 percent more income than what is needed to pay his debt obligation, therefore generating a positive cash flow. This valuation provides the lender with a quick tool to break down the borrower’s ability to sustain and pay off their debt obligation on a real estate investment. Lenders have company-specific ways to research and forecast what a particular real estate property may rent for, along with other important information that they may be interested in knowing. Zillow, for example, may be a website they utilize to u003ca href=u0022https://www.zillow.com/rental-manager/price-my-rental/u0022 target=u0022_blanku0022 aria-label=u0022predict what a particular property’s rental value is (opens in a new tab)u0022 rel=u0022noreferrer noopeneru0022 class=u0022rank-math-linku0022u003epredict what a particular property’s rental value isu003c/au003e. While other requirements must also be met to qualify for this loan type, this ratio calculation is key not only for the lender, but for the investor.
What is the appeal of DSCR loans?
One of the main benefits of a DSCR loan program is that a personal income calculation is not required. The lender is instead focused on the cash flow that the real estate investment at hand is predicted to generate. This erases the need to turn in those paystubs while also erasing the need for employment verification. If you happen to be self-employed or one that has a gap in employment history, this loan may have just become even more appealing. Along with these benefits, an investor can come to the closing table and close each loan in their entity’s business name which further allows you to separate personal information from business operations. Right away, this loan possesses a lot of positives that set it apart from other loan products.
DSCR Loans Can Offer Potentially Quicker Closing Times
Without the income verification as well as the job history check, this could potentially lead to a quicker close than what you might be accustomed to; another benefit of a DSCR loan. While the loan processors and underwriters are typically looking over those paystubs and running their checks on your employment history, these are areas that do not need verified in this situation. Getting the necessary funds in the hands of the investor is obviously the end goal and to do so in an expedited fashion is a win-win. Investment properties can often bring bidding wars, especially in today’s market, which means that having the ability to close quickly and smoothly is extremely valuable.
Down Payments for DSCR Loans
Regarding down payment amounts, the requirement often varies from 20 to 25 percent, depending on the lender. While other avenues, such as Sheriff Sales, may require you to pay for the investment property in full, the DSCR loan does not require this. This can save you from throwing a large sum of your wealth into your real estate investment property and instead gives you the opportunity to invest in more properties at once if you choose. In doing so, this could put you in an even greater positive cash flow position which is what you want and what we want for you.
To Sum It All Up…
All in all, DSCR Loans are an extremely valuable product that allows you to separate your business from your personal affairs, does not dig quite as deep into personal records, can offer a quicker closing time than other loan products, and requires a lower down payment than other real estate investment ventures. While no loan is seen as flawless, this option is extremely attractive as a real estate investor. While there are many roads that you can take to finance your real estate investments, you may find that this one is the best match for your needs.
What Beacon Lending Can Offer You When It Comes To DSCR Loans
You may be wondering how we fit in when it comes to your hunt for DSCR loans, or any loan for that matter. Whatever your situation, we are here to help. We understand the importance of offering an array of loan products to serve you because a “one size fits all” approach does not exist in the mortgage industry. If a DSCR loan is one that does interest you, contact us to discuss how we can help you take advantage of this opportunity. We look forward to meeting you where you are at in your journey.
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About the Author
Brian Quigley has been in the Denver mortgage industry since 2003. Customer satisfaction has been his top priority while guiding clients through the home loan qualification process. He is proficient in all types of mortgage financing including FHA/VA, Conventional, USDA, Jumbo, Portfolio, 1031 Exchanges, Reverse Mortgages, Refinancing, Construction loans, and FHA 203K loans.