Conventional VS DSCR Loan
Investor · San Antonio, TX · Member since 2018 · 188 posts · 54 votes
Conventional VS DSCR Loan
Most Popular Reply
Stacy RaskinBusiness Member
Lender · Member since 2022 · 1k+ posts · 503 votesConventional can make sense if you don't have to worry about debt to income (DTI) issues and you have a W2 job or are self employed but don't write off everything on your taxes as a conventional loan will be based on your adjusted gross income on your tax returns if you're self employed. Depending on your credit, down payment, property details, if you're self employed you may have to use two years of tax returns.
Generally people will consider a DSCR loan if they have maxed out their DTI, don't have a regular W2 job, don't make enough money to underwrite a loan based o their income, would like to hold the property in an LLC or would like an easier underwriting process as the lender is only looking at the purchase property and not asking for lots of income documents or excessive documents for other real estate owned.
There are also some properties like nonwarrantable condos that can't be conventional so DSCR loans are the way to go on financing for that. Not all DSCR lenders do these but some do.
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+ generally gets best pricing for investment property loans with most lenders
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
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.
Bright Skyline518 Reviews
9 Replies
- 2yStacy RaskinBusiness MemberLender · Member since 2022 · 1k+ posts · 503 votes
Conventional can make sense if you don't have to worry about debt to income (DTI) issues and you have a W2 job or are self employed but don't write off everything on your taxes as a conventional loan will be based on your adjusted gross income on your tax returns if you're self employed. Depending on your credit, down payment, property details, if you're self employed you may have to use two years of tax returns.
Generally people will consider a DSCR loan if they have maxed out their DTI, don't have a regular W2 job, don't make enough money to underwrite a loan based o their income, would like to hold the property in an LLC or would like an easier underwriting process as the lender is only looking at the purchase property and not asking for lots of income documents or excessive documents for other real estate owned.
There are also some properties like nonwarrantable condos that can't be conventional so DSCR loans are the way to go on financing for that. Not all DSCR lenders do these but some do.
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+ generally gets best pricing for investment property loans with most lenders
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
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.Bright Skyline518 Reviews - Investor · San Antonio, TX · Member since 2018 · 188 posts · 54 votes2y
@Stacy Raskin Great advice! Is there a lock in period with penalties when you have a DSCR loan and want to refinance?
- 2yStacy RaskinBusiness MemberLender · Member since 2022 · 1k+ posts · 503 votes
Quote from @Juan David Maldonado:
@Stacy Raskin Great advice! Is there a lock in period with penalties when you have a DSCR loan and want to refinance?
@Juan David Maldonado, glad you find it helpful! Yes, the DSCR loans I see have prepayment penalties from 1-5 years. Generally investors pick the prepayment term they feel comfortable with to plan to potentially refinance after that. There are some DSCR loans that have 0 prepayment- the shorter the prepayment penalty term, the more it will affect the rate. So a 1 year prepayment term will have a greater impact on the rate compared to a 2 year prepayment term.
Bright Skyline518 Reviews - 2yDevin PetersonBusiness MemberLender · Sarasota, FL · Member since 2022 · 2k+ posts · 665 votes
To avoid all of the red tape from standard conventional and quasi-programs I would definitely recommend that you seek DSCR financing,.
ProAlpha Capital56 Reviews - Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes2y
Conventional loans give you better rates. If you can qualify for that, get it.
- 2yJay HurstBusiness MemberLender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
Quote from @Juan David Maldonado:
Hey, I'm getting ready to purchase my first single family investment property. I have money saved up for a down payment plus more and good credit.
Should I go the conventional loan or DSCR loan?
I want to scale up after my first property
@Juan David Maldonado No reason to use a DSCR loan unless you simply have to due to debt to income ratio being to high on a full document conventional loan. The rates will be a bit better on the conventional, but rate is NOT everything. The DSCR loan will be more expensive upfront in terms of points and almost will always have a pre-payment of some sort. Pre-payment penalties are often brushed a side by the folks who push DSCR loans only but can be hugely expensive when rates are at 23 year highs. There is no guarantee rates do move down in the next 2-5 years but if they do that pre-payment penalty costing you up to 5% on some programs to refi is nuts.
And this is coming from some one who makes a lot of DSCR loans, and have for years. They are very useful for folks who have no choice, but if you can qualify for a conventional loan you should do that until you cannot for whatever reason.
Hurst Real Estate, INC4.991 Reviews - 2yEudith VacioPro MemberReal Estate Agent · Chicago & NWI · Member since 2015 · 860 posts · 521 votes
Hey @Juan David Maldonado - I would try to use all of your traditional loan options before getting into a DSCR loan, conventional financing would most likely be preferred since it will come with a lower interest rate!
- Investor · Fresno, CA · Member since 2016 · 222 posts · 237 votes2y
@Juan David Maldonado
As with so many things may answer is, it depends. DSCR loans have certain advantages and maybe required depending on which strategy you're going to do. If you are attempting a BRRRR, for example, you'll likely need a DSCR loan for the refinance. Conventional loans have 12 month seasoning requirements now and so you would be stuck with your original loan for at least that long. If you purchased it a hard money loan initially, then it's likely more cost effective to refi with a DSCR loan.
However, if you are just getting into your first property and looking to do a traditional buy and hold, it is hard for me to imagine a situation in which the DSCR loan will be more favorable for you. Conventional loans have lower down payment requirements (if you are an owner occupant), and lower interest rates and fees.
The best thing to do is to find an investment friendly mortgage broker. Explain your situation to them and have them guide you towards the best loan product for you. " Who, not how" is the answer to a great majority of real estate related questions.
- 10hErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
If your DTI allows it, conventional financing works best. Rates are generally lower and there are no prepayment penalties.
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