info about DSCR Loan
Member since 2023 · 13 posts · 6 votes
info about DSCR Loan
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Hi. Yea it is not easy starting out but it does get a lot easier over time. You will be ok if you study the game and learn from this forum. I would also advice to join a RE group local to you. I STRONGLY RECOMMEND talking to @Shawn Mcenteer as he's based in your area and has several investment properties. Shawn, you can probably help with these questions especially in the NJ market.
To answer your questions:
No major disadvantages really other than the rate is significantly higher than a conventional loan. Also, usually, there is a 5 year period where you pay a penalty if you sell the place or refinance it.
What to avoid? Just keep your personal credit in good condition (don't make any big purchases) and keep a lot of liquid funds on hand
DSCR lenders can be hard to find. I know of one based in NY. They gave me a loan here in Fort Lauderdale 2 years ago. It's a pretty easy process but I am not sure they would loan on a STR.
16 Replies
- Lender · Boston, MA · Member since 2023 · 415 posts · 95 votes2y
Hi Kelly,
Disadvantages: DSCRs typically have higher interest rates than conventional financing since they commonly come from a private lender.
Avoid: If you know you only plan to hold the property for 1-3 years before selling it or 1031 exchanging it, don't get trapped in a loan term pre-payment penalty since lenders will give you a lower rate in exchange for extending the PPP timeline.
Lender: Talk to other investors and agents and see who they recommend for a DSCR lender
If you have any additional questions, I'd be happy to answer them.
Hi. Yea it is not easy starting out but it does get a lot easier over time. You will be ok if you study the game and learn from this forum. I would also advice to join a RE group local to you. I STRONGLY RECOMMEND talking to @Shawn Mcenteer as he's based in your area and has several investment properties. Shawn, you can probably help with these questions especially in the NJ market.
To answer your questions:
No major disadvantages really other than the rate is significantly higher than a conventional loan. Also, usually, there is a 5 year period where you pay a penalty if you sell the place or refinance it.
What to avoid? Just keep your personal credit in good condition (don't make any big purchases) and keep a lot of liquid funds on hand
DSCR lenders can be hard to find. I know of one based in NY. They gave me a loan here in Fort Lauderdale 2 years ago. It's a pretty easy process but I am not sure they would loan on a STR.
- 2yErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Quote from @Kelly Williams:
I would like to purchase a new investment property and use it as AIRBNB to get profit. Based on my employment history I am only able to pull DSCR loan and I am seeking assistance in getting the right lender and doing investment the right way!
Only what's the disadvantages on DSCR loan ?
What to avoid during pulling DSCR loan?
How to find a decent DSCR lender?
I am ferly new in this market and would like to learn the ins and outs of investing in real state. I greatly appreciate all the advice and recommendation....Hello Kelly,
If you are planning to use the property as an STR, many DSCR lenders will require that you have 12 months of documentation either from the subject property or other real estate you own being used as an STR.
Lenders do not look at your employment history or personal debt. You qualify based on a market rent short term rental appraisal or an average of 12 months of documented income from the subject property.
Lenders require a minimum of 25% down for short term rental properties. A handful will do 20% down if you have experience.
There is a loan product that does not require the property to meet the DSCR requirement and does not look at your personal taxes. This is known as a no ratio DSCR loan. The rate will be high because of the looser requirements, but it will enable you to buy an STR with 25% down, no questions asked.
LuxePrivate Investments LLC 572 Reviews - 2yShawn McenteerBusiness MemberRealtor · Boonton Township, NJ · Member since 2013 · 2k+ posts · 1k+ votes
Hi @Kelly Williams happy to help with all of the above. I am loan originator and investor specialist. Happy to share lending options with you and what strategies my AIRbnb clients are using to be safe in todays market.
House Hacking New Jersey563 Reviews - Lender · Springfield, MO · Member since 2023 · 109 posts · 78 votes2y
Quote from @Tychua G.:
How is the prepayment penalty calculated?
The typical prepayment penalty is 5% in year 1, 4% in year 2, 3% in year 3, 2% in year 4, 1% in year 5. So if you were to sell or refinance within that 5 year period there would be a fine associated with that and it is based on what year you are on the loan.
If your loan was $100,000...
Year 1 your penalty would be $5,000, year 2 would be $4,000, year 3 would be $3,000, year 4 would be $2,000 and year 5 would be $1,000. No prepayment penalty after the 5th year
Some lenders base the fee on the initial loan amount, and some base it on the balance, however since interest is front-loaded that won't make a huge difference.
A lot of my clients are looking and getting shorter prepayment penalty options, such as 3% in year 1, 2% in year 2, and 1% in year 3. There are options for even shorter.
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Kelly Williams:
I would like to purchase a new investment property and use it as AIRBNB to get profit. Based on my employment history I am only able to pull DSCR loan and I am seeking assistance in getting the right lender and doing investment the right way!
Only what's the disadvantages on DSCR loan ?
What to avoid during pulling DSCR loan?
How to find a decent DSCR lender?
I am ferly new in this market and would like to learn the ins and outs of investing in real state. I greatly appreciate all the advice and recommendation....Before you contact the DSCR lender, make sure and calculate your number is right, such as if you put 40% down, can you meet the DSCR 1.05 with 9% interest rate. It's all coming back to you, because if you don't do your homework, you would be negative.
DSCR is actually not needed for Airbnb unless it's a non-warrantable condo. But since the spread between QM and non-QM is so low now, again what's important is your calculation forecast. - Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Erik Estrada:
Quote from @Kelly Williams:
I would like to purchase a new investment property and use it as AIRBNB to get profit. Based on my employment history I am only able to pull DSCR loan and I am seeking assistance in getting the right lender and doing investment the right way!
Only what's the disadvantages on DSCR loan ?
What to avoid during pulling DSCR loan?
How to find a decent DSCR lender?
I am ferly new in this market and would like to learn the ins and outs of investing in real state. I greatly appreciate all the advice and recommendation....Hello Kelly,
If you are planning to use the property as an STR, many DSCR lenders will require that you have 12 months of documentation either from the subject property or other real estate you own being used as an STR.
Lenders do not look at your employment history or personal debt. You qualify based on a market rent short term rental appraisal or an average of 12 months of documented income from the subject property.
Lenders require a minimum of 25% down for short term rental properties. A handful will do 20% down if you have experience.
There is a loan product that does not require the property to meet the DSCR requirement and does not look at your personal taxes. This is known as a no ratio DSCR loan. The rate will be high because of the looser requirements, but it will enable you to buy an STR with 25% down, no questions asked.
Theoretically it's even impossible to pass DSCR 1.1 if down is less than 35% with cap rate of 3.5% in today's airbnb market. I like DSCR lender that has more stricter underwriting actually.
- Lender · Austin, TX · Member since 2022 · 474 posts · 586 votes2y
Kelly - Sounds like a DSCR option would be a good fit given your situation. As others have mentioned, understanding prepay penalties is important with this product. Additionally, finding a lender that is flexible with STRs will be key. Requirements and the specific income they can underwrite will vary lender to lender.
I would suggest calling a handful and asking questions about how they intend to "qualify the loan" (market rents, AirDNA projections, etc.) and other requirements surrounding their STR product.
@Sarah Hatton is knowledgeable in in the DSCR space and more specifically with STRs. Strongly recommend reaching out to her! Best of luck.
- 2yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votesDSCR loans are alive and well; not as well as they were in February of 2022, but they still close.
Quote from @Kelly Williams:
I would like to purchase a new investment property and use it as AIRBNB to get profit. Based on my employment history I am only able to pull DSCR loan and I am seeking assistance in getting the right lender and doing investment the right way!
Only what's the disadvantages on DSCR loan ?
What to avoid during pulling DSCR loan?
How to find a decent DSCR lender?
I am ferly new in this market and would like to learn the ins and outs of investing in real state. I greatly appreciate all the advice and recommendation....
With the rise of conventional financing, the rates are higher, but the disparity isn't that bad.
Always, always, always use conventional financing instead of DSCR until you can't. Then DSCR is your next best friend (says the DSCR broker).
Know investing is a math problem and be ready to walk away if the math doesn't work out in your favor.
What to avoid?
Avoid big purchases and the normal things that you would avoid with conventional financing.
Avoid any broker that says you can live in a property financed by a DSCR loan and avoid rates that are too good to be true because they are.
Make sure you have enough cash for 6 months of payment reserves, 25% down payment and figure on paying around 2 points depending on the loan size. There are other closing costs, so factor that in. - Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Stephanie P.:
DSCR loans are alive and well; not as well as they were in February of 2022, but they still close.Quote from @Kelly Williams:
I would like to purchase a new investment property and use it as AIRBNB to get profit. Based on my employment history I am only able to pull DSCR loan and I am seeking assistance in getting the right lender and doing investment the right way!
Only what's the disadvantages on DSCR loan ?
What to avoid during pulling DSCR loan?
How to find a decent DSCR lender?
I am ferly new in this market and would like to learn the ins and outs of investing in real state. I greatly appreciate all the advice and recommendation....
With the rise of conventional financing, the rates are higher, but the disparity isn't that bad.
Always, always, always use conventional financing instead of DSCR until you can't. Then DSCR is your next best friend (says the DSCR broker).
Know investing is a math problem and be ready to walk away if the math doesn't work out in your favor.
What to avoid?
Avoid big purchases and the normal things that you would avoid with conventional financing.
Avoid any broker that says you can live in a property financed by a DSCR loan and avoid rates that are too good to be true because they are.
Make sure you have enough cash for 6 months of payment reserves, 25% down payment and figure on paying around 2 points depending on the loan size. There are other closing costs, so factor that in.very sincere post !
@Stephanie P.What are the typical loan sizes for each tier that have point adjustments?
- 2yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Tychua G.:
@Stephanie P.What are the typical loan sizes for each tier that have point adjustments?
Little loans get charged a bit more. Usually below 125K, we charge an extra point. The same amount of work goes into a little loan as a big loan, but you just make a lot less.
- Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes2y
DSCR disadvantage- most have prepayment penalties and points to get in; subject has to cash flow and this in some markets means very large down payment to make it work; if you never did short term rental they use long term MARKET rents; property has to be ready to rent; rates a bit higher
DSCR what to avoid- describe your situation with exact truth; HOA cost is going to hurt you to cash flow; the HOA has to qualify as the property is VITAL
DSCR- licensed by the state the property sits in; get some recommendations
What you didn't ask:
You need good to excellent credit. There are minimum loan amounts. Get your hazard insurance quote the day you make the offer as those numbers need to be exact and real. Know if flood insurance is required and you need to apply in advance a week. Are there three comparable sales for the subject?
- 2yRay WilliamsBusiness MemberLender · Denver, CO · Member since 2017 · 160 posts · 72 votes
Disadvantages- most have a pre-pay penalty- So know your numbers. And if this is going to be an STR a standard DSCR loan doesn't use STR ADR numbers. Often times STR deals are based on the figures/anticipation of what the revenue will be. There can be a disconnect when it comes to the appraisal for you off what an appraiser says the rent will likely be, and what the AirDnA data says revenue is.
The fix, get a STR DSCR loan. Those are built specifically for what you are after. They use AirDNA data for the credit you will receive for estimated rents. NOT the rent estimates for long-term rental income, these are two very different figures. They do require a minimum occupancy %, usually they like to see 65%. But a nice thing about these types of loans is exceptions can be granted for other factors (such as your liquid savings)
- Denver, CO · Member since 2018 · 133 posts · 97 votes2y
@Kelly Williams There are many lenders that can do various types of DSCR loans. The lenders above described some great pros and cons. I would make sure you understand how the lender estimates rents (some can use AirDNA and others only use comparable long term rents). You can find many DSCR lenders on BP's Lender Finder and read reviews. Easy Street is one of the few that does STR's. DSCR loans for STRs based on Airdna data is very hard to find.
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