Question about investing with a DSCR Loan

[Matt Randall]

Im hoping someone can give me some advise on this, I'm looking at buying a triplex and putting about 25% down and using a DSCR loan for the rest, has anyone that has used a DSCR loan have anything good or bad to say about them? id like to know what someone that has done it thinks about it. Any and all input is much appreciated!

Thanks, Matt

[Daniel Sperling]

Hi Matt, as a rental investor I have several DSCR loans. As a DSCR lender, I have originated ~200 DSCR loans so far so my answer will hopefully be helpful.

In my opinion, the pros of DSCR loans far outweigh the cons, which is why DSCR loans are now the go-to form of financing for rental property investors.

Pro Number 1: Streamlined Underwriting

DSCR loans have a shorter and less demanding processing checklist than bank loans and conventional loans. Underwriting items for DSCR loans include appraisal, credit report, liquidity verification, borrowing entity documents, landlord insurance verification, and where
applicable lease, verification of rent and security deposit receipt, and property management agreement.

DSCR lenders should never ask you for tax returns, W-2 income, pay stubs, or company financial statements.

A good DSCR lender can fund your DSCR loan in under 30 days.

Pro Number 2: Loan Structure

DSCR loans are generally structured as thirty year term, fixed rate and fully amortizing, with LTV up to 80%.

To increase cash flow and boost DSCR to qualify for a higher LTV, you can even structure with a five or ten year interest-only period where principal payments are made over the remaining portion of the 30 year term.

Most DSCR lenders can fund your loan with DSCR as low as 1.0, though 1.1 is where you will find the best terms.

A few DSCR lenders specialize in no and low seasoning cash out refi for rental property investors who use the BRRR strategy.

Compare this to traditional banks which generally offer lower LTV, shorter term, higher DSCR requirement, and 6 months of seasoning.

Pro Number 3: Reliability

DSCR loans are a growing component of the multi trillion dollar institutional credit market.

While DSCR loan origination volume is growing fast, it struggles to satisfy the demand from institutional investors such as insurance companies, pension funds and credit funds that buy DSCR loans.

For this reason, as long as DSCR loan program guidelines for subject property and borrower are met, there is a very high probability that your loan will be funded
without delay.

Compare this to banks which may subject you to months of underwriting before ultimately rejecting your loan application for reasons unrelated to your application.

Con Number 1: Strict Guidelines

The largest and healthiest part of the DSCR loan industry is 1 to 4 unit residential investment properties in non rural markets where the As Is value and the purchase price is one hundred thousand dollars or higher, and the guarantor's credit score is 680 or higher.

If an element of your transaction does not fall within program guidelines, your loan will either be declined or require an exception which can cause delay.

DSCR loan program guidelines are constantly evolving to adapt to the demands of borrowers and institutional investors, and to respond to market and risk.

A good DSCR lender will knowledgeably and transparently communicate program guidelines, proactively communicate to identify potential issues, and set expectations in a clear and thoughtful manner.

Con Number 2: Shenanigans

The DSCR loan industry is fast growing and loosely regulated, attracting loan brokers, private lenders and salesmen who are not knowledgable about program guidelines, not expert in structuring your loan to meet your specific goals, not capable of closing your loan in a timely manner, and not truthful or transparent about loan terms.

Con Number 3: Higher interest rates

Given the demand for DSCR loans from institutional credit investors, the credit spread or risk premium has decreased, making DSCR loan interest rates from the most competitive DSCR lenders nearly the same as bank loans and conventional investment property loans.

We should include an asterisk on this con because it is not always true and may not be true in the future.

For the vast majority of rental property investors who want a streamlined borrowing experience with a high degree of certainty that their loan will be funded on an accelerated timeline, DSCR loans are strongly preferred as long as property and borrower guidelines are met.