Interest Only DSCR

[Nathan Frost]

Can someone explain to me how DSCR works and why it would be better to do interest only payments vs a 30 year mortgage on an investment property?

Seems the interest only quotes are still high and not worth it.

[Forrest T Schue]

Disclaimer, I haven't used a DSCR loan yet. However I've been doing a fair amount of research on them and recently gotten the scoop from my lender.

My understanding of why a DSCR is beneficial to investors is that:

-The underwriting of the loan is done based on the deal itself and not your current income position. Meaning you can get the loan without claiming high income or if you have just switched to self-employed(as long as the deal will cash-flow or break even).

-More friendly seasoning periods for cash-out refi's. With Fannie Mae's new 12 month cash-out refinance guidelines, DSCR allows you to cash out in 6 months or sooner on a BRRRR.

-Interest only payments allow you to offset the higher cost of interest rates. I believe DSCR interest rates usually run 1.5-2.5% higher than conventional. So if you're using DSCR as a short term option until you sell, or refinance, int only can help monthly payments.

A possible downsides(other than higher int rates) is that there may be an early pay-off fee. This I've heard can vary between lenders and you may need to shop around before you find the right one for you. 

I hope this helps. And anybody feel free to correct me if I'm wrong!