Homeowner · Modesto, CA · Member since 2024 · 2 posts · 1 vote
I'm looking into doing a DSCR loan to invest here local however with the down payment plus the 3 to 6 months reserves and closing cost I'm falling short about 40k. Does anyone have any recommendations or advice on what I could do?
Hi Leo, you have a couple options. What % down payment are you doing? Can you put down less of a down payment? You could ask the seller to cover closing costs. Depending on the specific lender you're working with you may be able to receive gift funds towards the down payment and then you will just need to show the funds for reserves.
Hey Leo, I can do a DSCR at 85% LTV even for first time landlords. Amber is also right about grabbing another 2%-3% from the seller to cover out of pocket costs so you can focus on your available cash going towards the down payment and nowhere else.
I'm looking into doing a DSCR loan to invest here local however with the down payment plus the 3 to 6 months reserves and closing cost I'm falling short about 40k. Does anyone have any recommendations or advice on what I could do?
You’re pretty close, and that gap is more common than you think with DSCR loans since they’re capital-heavy upfront. A lot of investors either look at bringing in a partner for the gap, negotiating seller credits, or adjusting the purchase price rather than forcing a deal that stretches them too thin. Another route I’ve seen work well is shifting focus to Midwest markets, where purchase prices are lower, so the same DSCR structure requires significantly less cash to close while still giving you strong cash flow. Sometimes, solving the capital problem is less about raising more money and more about choosing a market where the numbers work better from day one.
There are different factors that can affect the DSCR loan such as down payment, credit and DSCR 1 ratio. Not all mortgage brokers have the same guidelines so there will be differences for programs between mortgage brokers and lenders baed on credit score, LTV, etc.
For example, some mortgage brokers or lenders will be ok with a DSCR 1 ratio and some want a DSCR 1.2 ratio meaning that instead of $1,000 of expenses being paid for by $1,000 of rent, a lender might require $1,200 of rent for $1,000 expenses. For a 1-4 unit, for underwriting, expenses usually considered are the new mortgage, property taxes & insurance and HOA if applicable.
Also, different lenders will have different down payment amounts. Generally it can be hard to put down less than 20% as that weighs on the rate which affects the DSCR ratio. All these factors interact with each other. More on DSCR loans and how the programs work: DSCR loans won't use your income to underwrite the loan.
DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.
Here's a bit more in detail about how rates are calculated for DSCR loans:
1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.
2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.
3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.
4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.
I've included an example below to help illustrate this.
So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.
See example below:
DSCR < 1
Principal + Interest = $1,700
Taxes = $350, Insurance = $100, Association Dues = $50
Total PITIA = $2200
Rent = $2000
DSCR = Rent/PITIA = 2000/2200 = 0.91
Since the DSCR is 0.91, we know the expenses are greater than the income of the property.
DSCR >1
Principal + Interest = $1,500
Taxes = $250, Insurance = $100, Association Dues = $25
Total PITIA = $1875 Rent = $2300
DSCR = Rent/PITIA = 2300/1875 = 1.23
If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.
DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals. Happy to connect to discuss further.
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