What is a DSCR loan program?: How are they a benefit to property investors in 2023 and beyond?

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.

Debt Service Coverage Ratio Calculator (DSCR)

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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