I've currently been shopping around banks for a DSCR loan on a BRRR. I've now had 4 banks get back and say they only offer up to 25 year amortization and 5 year rate terms. They can do around %8 on the loan. When i first started reading about DSCR i was under the impression they were still generally 30 year fixed loans.

Is 25 years and 5 year terms the current norm? Would you be reluctant to go with a 5 year term?

Lincoln, Nebraska

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Robin Simon

#3 Private Lending & Conventional Mortgage Advice Contributor

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Austin, TX

Robin Simon

#3 Private Lending & Conventional Mortgage Advice Contributor

Lender
Austin, TX

Replied February 22, 2024 05:33

Quote from @Jordan Fujan:

Is 25 years and 5 year terms the current norm? Would you be reluctant to go with a 5 year term?

I don't think you are looking at what is generally referred to as "DSCR Loans" if what you are getting quoted back are from banks and they are offering 5-year terms. What is commonly known as DSCR Loans are loans from private lenders, not typically banks, and these loans are part of the "Non-QM" umbrella and turned into mortgage-backed securities, not typically held on a bank's balance sheet.

Here are some articles published on BP that should help!

https://www.biggerpockets.com/blog/what-documents-do-you-nee...

What are DSCR Loans?

While there isn’t an exact, commonly agreed-upon definition out there, here is a handy definition for this specific loan product:

DSCR loans are mortgage loans secured by residential real estate turnkey properties, strictly used for a business purpose and underwritten primarily based on the property.

Important note: DSCR loans refer to the specific loan type, and the "DSCR ratio" (debt service coverage ratio) is a metric used for underwriting and evaluating these loans (and other loans), but the metric and ratio itself are distinct things versus what is referred to as “DSCR loans.”

Some key things to note in the definition:

DSCR loans are secured loans (meaning that there is collateral that the lender can take if the borrower doesn't pay back the debt). They are also mortgage loans, i.e., secured loans for which the secured collateral is real estate.
DSCR loans cover residential real estate properties, not commercial real estate properties. So investment properties that are commercial in nature (think office buildings, retail strip centers, etc.) cannot use DSCR loans. They can be leveraged with commercial real estate loans that use the DSCR metric for evaluation; however, these are not under the "DSCR loan" product bucket.
DSCR loans are for "business purpose," only meaning that the owner of the property can not live in the property under any circumstances. These loans are strictly for investment properties where the property is owned and operated for business purpose and rented out for income. Additionally, for DSCR loans for which the purpose is a “cash-out refinance,” the use of the cash-out proceeds must also be used for a business purpose. Commonly, these proceeds are used for further real estate investment or costs related to the borrower’s real estate business and strictly can‘t be used for personal uses, such as paying off personal credit cards or any nonbusiness expense.
DSCR loans are "primarily based on the property," meaning that the lender evaluates and qualifies the deal mostly but not completely based on the property’s investment potential. This is a common misconception where people sometimes assume DSCR loans are purely based on the asset. DSCR lenders will run personal credit (which, along with LTV and DSCR, is among the three biggest factors determining your rate and terms) and typically require three to six months of PITIA “reserves” in liquid assets. The rest of the documentation and underwriting will be based on the asset, but it’s important to remember that qualification isn’t 100% based on the property. Your credit and some basic liquid assets matter, too.
Finally, DSCR loans are for "turnkey" properties only, meaning any property needing any significant renovations or rehab is not going to qualify, and you will likely need to explore hard money options instead.