Has anyone used a DSCR Loan, what are your experiences with loan product?

Question

I finally want to dive into put my training wheels to the test, I'm looking into investing in Ohio, and would like to know has anyone used a DSCR loan? I initially wanted to do a BRRR but since I'm not the from the area, real estate agents are telling me I should maybe start out with a turnkey to get my foot in the door? Can I please have the BP community thoughts on this?
Is DSCR loan worth it or does it depend on my strategy. I hate that my money would be stuck in the property though. hoping to get some insight.

Devin Peterson · Answer

Hi Andrea, It would depend on what your strategy is going to be in the long run. DSCR loans are great for investors seeking rental properties that they want to cash flow upfront. If you want to renovate the asset, you may want to see a bridge or hard money loan. There are a lot of assets in Columbus that are basically turn key properties, and even if you have some minor renovations (5k-10K)I would recommend trying to go after an interest-free credit card AFTER you are approved and close for your loan. Don't shop credit cards and mortgages at once, you ll create havoc for yourself. I would be happy to connect and chat more if need be. Good luck!

FYI for all real estate questions regarding the Columbus market I recommend @jimmylieu - he is the BEST!

Kristen L Garner · Answer

Hi! I have personally used DSCR for my own purchases as well as with many of the investors I work with.  It allows buyers to qualify with different guidelines than what a conforming loan would require.  Instead of needing to meet DTI, income, etc qualification standards, DSCR loans qualify based on the asset itself.  DSCR and other products in the nonQM category allow you to close in an LLC as well which is important to some investors.

Starting with a turnkey is certainly the easiest first step for OOS investing but it all depends on your strategy and goals.

Below are some general notes on DSCR loans:

* usually used for single family or 2-8 multi family unit properties (fits your scenario)

* must be for investment, non owner occupied (if looking for a product for alternative qualifying solutions for owner occupied there are other products)

* can close in a personal name or LLC

* usually 80% LTV for a purchase (20% down payment) & usually 75-80% LTV for cash out refis

* prepayment penalties vary and are optional, but the higher the prepayment penalty, the lower the rate / options typical range from no prepay all the way up to 5 year prepay and structures vary for how those penalties work (3 year is my most popular by far)

* appraisal most likely required and paid out of pocket during transaction

* can be used for long term, mid term, or short term rental properties

* generally 1%+ is the desired DSCR ratio but you get better rates if the ratio is higher (usually rate breaks kick in at 1.15%+ or 1.25%+) and you can still get the loan done if ratio is lower than 1% but the rate will reflect that (DM me if you wand help learning how to calculate the ratio)

* the average time to close is 21-30 days

* fees vary lender to lender and product to product, but $1595 underwriting plus title fees is pretty standard

* 700+ credit is preferred to get max LTV, but plenty of options if credit falls below that

* a typical loan minimum is $75k (have limited options for $50k+) and typical loan maximum is $3-4m (have limited options for $4m+)

* 3 months reserves usually required, having 6+ months will usually result in better loan terms, 0 reserves can still get the job done if you go with a program that allows you to use the cash flow as reserves

* 30 year fixed, IO, and ARMS available

Jason Wray · Answer

DSCR is great if you want to avoid using your income/tax returns due to DTI or large write offs.  Most 1099 self- employed investors generally write everything off so using 1040's, 1120's or 1065's is a no go for tax returns.  If you can qualify using your income I would avoid DSCR but again its not the end all they have value.

DSCR single family requires 15% down, 2-4 Units require 20% down, they offer 5/6 ARMS, 30 & 40 Year fixed and I/O Interest only options which can help cash flow first few years.  Downfall is they will require a prepayment penalty in order to get a better rate.  If you are buying a turn key and do not expect to take cash out for a few years just gauge that on your prepayment penalty years.

Rates vary depending on credit scores, LTV, DSCR ratio, Loan amount, Property type, number of units.

Good news is rates have been dropping so DSCR may not be a bad option if you buy and simply refinance in 12-24 months.  Just have to make sure you request a 1-2 year prepay.

Jimmy Lieu · Answer

Hi Andrina, DSCR is an amazing financing option! It's best for when you don't have two years of W2 work history. The reason why is because financing is based on the rent numbers of the property and the DSCR ratio and not on your personal debt to income ratio. Happy to connect and answer any question you may have.

@Devin Peterson is an amazing financing resources! Would recommend connecting with him

Austin Steed · Answer

I've been investing in Columbus for 5 years now with house hacks and heavy rehab BRRR's. I too usually tell people to start with more of a turnkey property or a light cosmetic rehab. This way you will start building a base here and learning the construction side of things.

Starting with a heavy rehab BRRR's would be kind of like drinking from a fire hose. Although I don't know your construction experience. If you can start with something that needs a light cosmetic rehab, countertops, floors, paint I would say is the way to go!

Then in a few years if you have appreciation you could refi out of the loan. Would work the same as a BRRR just over a longer period of time.

Jimmy Lieu · Answer

Hi Andrina, I personally love Columbus Ohio and as someone who works with a lot of out of state investors - there's so many catalysts for why you should invest here. Specifically, there's job growth (Intel, Honda, Amazon, Nationwide, etc) and the population is growing (unlike Cleveland or Cincy). I really see Columbus Ohio as an extremely safe bet for the next 10-20 years. Plus, there's still so many positive cash flowing and 1% deals here in Columbus Ohio. Just this month, I’ve gotten under contract for my clients for multiple 20%+ cash on cash rental properties so there’s definitely tons of opportunity here. As a local investor and agent here in Columbus, let me know if you have any questions or want to connect!

PS: If you're going with a DSCR loan, I STRONGLY recommend Devin Peterson. He's the best in the business! Have worked with them on a ton of client deals

Jason Allen · Answer

DSCR loans offer several benefits. Lenders require limited paperwork and there is limited personal liability on the loan. I'd suggest a turn-key rental or a light rehab to get started.

Bridgett J Bell · Answer

My DSCR experience is with pulling out equity after we've bought properties for cash and leased them. I love this loan because of how easy the paperwork process is.

Brayden Hrycko · Answer

Hello @Andrina Maximin,

DSCR loans are great! Pretty cut and dry process. If you have assets or a partner that can show their assets and a decent credit report you're good to go. Experience will help on the leverage and rate but not required. I help clients with DSCR loans often when they don't want it on their credit or their income isn't able to qualify.

BRRRR and turn key is up to you. You can DSCR out of a fixer as well like your normal refinance at the end of the project. You just want to have a team you trust to run your out of state BRRRR's. Nothing you can't handle with the BP community and interviewing some of the great people here that are in those areas.

Best of luck to you!!

Justin Brickman · Answer

DSCR can be a great product. However it was a very stressful transaction for me, and the underwriting process delayed my closing 45 days. I would just say be ready for some ups and downs all the way until closing because there's a lot of moving pieces until you finally get clear to close.

Has anyone used a DSCR Loan, what are your experiences with loan product?

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