Thanks for your thoughtful reply! You raise some excellent points regarding DSCR loans and the broader economic context. Let me address your questions and provide additional clarity on key aspects:
1. Delta of Offered Rate vs. Traditional Lending for Investment:
DSCR (Debt Service Coverage Ratio) loans do generally carry a slightly higher interest rate compared to traditional investment loans, typically 1-2% more. The advantage, however, lies in the flexibility—no income verification, minimal red tape, and more lenient underwriting. For a foreign investor, the red tape for a traditional mortgage can be excessive - to say the least. This might offset the rate difference, especially when conventional financing isn't as easily accessible due to strict income or employment documentation requirements.
2. Lock-in Period or Terms:
Lock-in periods for DSCR loans typically are a 5-year stepdown prepayment penalty, this is a good balance between flexibility and cost, but they offer flexible term lengths. While it's true that locking in rates for a longer term can seem counterintuitive during steep yield curve normalization, you can remove prepayment penalty altogether if you are comfortable with a higher interest rate. It's important to align the lock-in period with your investment horizon and risk tolerance, we can explore this further in a comprehensive consultation.
3. Early Closure Penalty or Refinancing:
Most DSCR loans come with an early prepayment penalty during the fixed period, but this can vary by lender. Some offer declining prepayment penalties (e.g., a 5-4-3-2-1 structure) where the penalty decreases each year, and others waive penalties after a certain number of years. As for refinancing, it is generally possible, but evaluating the costs, including closing fees and any additional points, is key.
As a side note, you are obviously concerned about interest rate, and this can make a difference of hundreds dollars per month, but I see clients with properties where the monthly lease is 2x the monthly mortgage payment. Even at 10% interest rate they would be making a lot of money each month, so they are unconcerned about a 7% interest rate. For them the focus is on rapid and easy expansion...
4. Borrowing Under Company or Trust Structures:
Yes, DSCR loans are well-suited for borrowers using LLCs, trusts, or other legal structures. This is one of their biggest advantages as they often bypass the personal liability and credit reporting of traditional loans. Many investors use LLCs or trusts for tax benefits, asset protection, and estate planning, so this flexibility can be a significant advantage.
5. Higher Deposit (Down Payment) for Favorable Lending:
Offering a higher down payment, like 30%, often does result in more favorable loan terms—lower rates, higher loan-to-value ratios, and less stringent underwriting. This might reduce your overall interest costs and allow you to secure a more attractive rate compared to a traditional 20% down payment scenario.
Platforms for State → City → Suburb → Street Analysis:
For narrowing down markets, here are some platforms I recommend:
- Zillow and Realtor.com for broad market data, filtering by city/suburb/street.
- Roofstock for turnkey rental properties with in-depth neighborhood analysis.
- Mashvisor for detailed real estate analysis, including cash flow and rental estimates.
- Redfin and NeighborhoodScout for granular street-level data, crime statistics, school ratings, and property value trends.
Once you narrow down to the city level, I agree that leveraging local resources—real estate agents, local investor networks, or property managers—will be key to gaining more granular insights on specific neighborhoods and streets.
If you'd like, I can also provide you with a sample DSCR terms sheet to further illustrate potential terms. Feel free to reach out if you need more insights!
Best regards,
