DSCR Loans - How do they work?

Question

Has anyone used a DSCR loan? What was your experience? Are they a good option to start out with?

Stephanie P. · Answer

These types of loans are the best choice for borrowers that can't qualify for conventional financing.  Note that conventional financing is still the preferred loan product because of the rate and fee structure.  Unfortunately, many don't qualify for conventional financing for one reason or another.

Some facts about

They close in about 30 days if you get the documentation in in a timely manner.

They require full appraisals (which is usually what takes the longest).

Typically you need to have 6 months of reserves, but if you're doing a cash out refinance, the cash can be used for reserves.

Credit scores go down to 620 middle

They require prepayment penalties

Rates and fees are higher than conventional

No income verification like tax returns, pay stubs or profit and loss statements are required.

Usually, it costs at least 2 points and about 2K in lender/broker fees.  I don't know anyone that's charging .5%.  Unlike conventional where the broker's fees are "lender paid" most DSCR brokers charge the borrowers at close.

Never pay an "application fee" or any other fee up front other than for third party services like appraisal or credit report.

Hope that helps

Stephanie

Jill F. · Answer

We use them. We didn't have any w-2 income so DTI requirements with traditional financing are a problem for us. The other reason to use them is if you are buying 5+ unit properties or groups of properties and holding them in an LLC. You can't do that with conv. financing.  In spite of the higher rates it worked out well for us because we developed a relationship with a lender early on that allowed us to grow.

Steven Goldman · Answer

Hi Sarah:  A DSCR loan is a good alternative if you have 20 percent down and you do not want to, or can not pass, a complete mortgage underwrite. A traditional loan with a bank will consider your credit score, global DTI and DSCR. All of the members of your LLC will have to guaranty the loan. A DSCR lender will only consider your credit score, and your Debt service coverage ratio on the target property. They are not concerned with your personal DTI . Also a funding company will only require a single guarantor on the loan. Funding company and DSCR only lenders are more expensive in fees, costs and rates. They are much faster than a bank. Before you enter into an agreement of sale for the purchase of a property you should contact your broker or lender and have them quote you on the deal. That way you understand the cost of the money and the interest rate. I always recommend getting a broker or lender on your team as you ramp up your real estate business.

Ramin Lavi · Answer

Hi Sarah,

My clients utilize this product often especially on the 1031 exchange side.  Here in S. California the product is especially helpful when the buyer is doing an Airbnb situation since it's not very likely that a property will cash flow on a typical 12 month lease unless it's a substantial down payment.  You should expect at a minimum to come in with 15% for a down payment and pay 0.5 points at a minimum.  For the more aggressive interest rates, you want to have at least 30% down, good credit and see cash flow (either through Interest Only or P&I).

Are they a good option to start out with? No, if you have no mortgage experience or don't currently own a home I don't recommend utilizing a DSCR loan nor will many lenders give you one.

Feel free to reach out if you need questions answered.

Jon Kelly · Answer

@Sarah Bella I work for a dscr lender and I will be honest and say they are NOT the best way to get started... DSCR loans have a lot of positives (focus on the property and less on the borrower, easier / common sense underwriting, quicker closing process, etc), HOWEVER there are many other products for first time homeowners or investors.

Rates have gone up significantly over the past month+. You can find a much better rate at a smaller / local bank.

Ramin Lavi · Answer

@Stephanie P.

Hi Stephanie, our bank will typically only charge 0.5 points with 15% down and credit above 700.  For our primary residence and 2nd home (vacation home) no doc loans we are similar.  Yes, we have primary home no doc loans up to $3M here in California and various other states!

Erik Estrada · Answer

@Sarah Bella Using a DSCR loan is a great way to get started if you are self-employed. You can do a cash-out refinance on your primary and buy another property without the headache of proving income for your business.

Zach Edelman · Answer

@Sarah Bella contact me at eight four seven- four seven one - six three eight four. I am an LO at a DSCR lender known as Easy Street Capital. I would love to help educate you on how the process works and what to expect. Knowledge is power!

Sarah Bella · Answer

@Ramin Lavi, @Jill F. and @Stephanie P.

Thank you so much for this input!! There are so many options out there, it's hard to know where to start! I do have a LLC and owe a home, but its my primary residence, not an investment property. I think, at this point I am too inexperienced to aim for this kind of loan. I am sure that will change and I appreciate your honest answers and input!!

DSCR Loans - How do they work?

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