DSCR, HELOC or traditional loan?

Question

I have a free and clear, rented property I intend to keep for now, but want to get a loan to pay off another property's loan to 1031 it with no mortgage balance.  Is the DSCR loan possible in this situation assuming the property qualifies?  Just getting started on this, and exploring loan options on the free and clear property.

Katie Smith · Answer

Hi Dean!

DSCR would be the way to go in this scenario.  Quick 20-30 day closing, and it will not affect your DTI. DSCR generally requires low documentation, no tax returns or W2's, and you can put all of your investment properties in separate LLC's to protect your other assets.

Let's connect

Stacy Raskin · Answer

You can do a DSCR loan for the rental property if it is free and clear. More info on DSCR loans:

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 lenders2. 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 < 1Principal + Interest = $1,700Taxes = $350, Insurance = $100, Association Dues = $50Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91Since the DSCR is 0.91, we know the expenses are greater than the income of the property.DSCR >1Principal + Interest = $1,500Taxes = $250, Insurance = $100, Association Dues = $25Total PITIA = $1875 Rent = $2300DSCR = Rent/PITIA = 2300/1875 = 1.23DSCR 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.

Alex Hunt · Answer

Yes DSCR cashout refinance is a good option here! Happy to connect on this.

Brittany Minocchi · Answer

Hey Dean -

Any of those 3 products you mentioned could be potential options, and I'll add a 4th as well in case it's handy for any future properties (wouldn't apply here since this property is free and clear).

1.) DSCR: your income, employment history and DTI will not be considered, so the paperwork is lighter compared to the other 2 options. Instead, the lender wants to see that the monthly income from the property can cover the principal, interest, taxes, insurance and HOA (if applicable). Rates are slightly higher than conventional loans right now. 100% of your rental income is used to qualify you with most lenders. This loan type has a prepayment penalty unless you buy it down or the property is in a state that has certain rules (sometimes lenders prohibit them in certain states and you're forced to buy it out, which will increase your interest rate). You can close in an LLC if that's a concern, and many times the debt isn't reported to personal credit. This comes in handy for any future conventional financing you might apply for.

2.) HELOC: they are out there, but you typically have to hold title in your name and not under an entity. 70% LTV is usually the cap, and rates are double digits (mid teens). This is a line of credit, so you can make draws over a set period of time and are only charged interest on what you use. Full documentation to qualify, including employment history, income and DTI.

3.) Traditional financing: Full documentation needed to qualify. No prepayment penalties. Likely the lowest interest rate of all 4 options. 75% of gross rental income will be used to qualify you.

4. HELOAN: Second position, lump sum loan. Rates will be comparable to an investment HELOC (likely slightly lower) but are fixed, not variable. Multiple income documentation options - full doc, 1099, bank statement, DSCR, etc. These have prepayment penalties as well. For those who cannot qualify for traditional financing and don't want to mess with their first mortgage by doing a cash out refi, this is an ideal option.

If you can qualify, traditional financing is going to give you the best rate in terms. Otherwise, I'd say a DSCR cash out refi, then a HELOC.

Jay Hurst · Answer

DSCR would be an option, however, if you can qualify for a full a documentation loan your rate and terms (like your upfront closing costs and pre-payment fee that come with most DSCR options) are better with a full doc loan. Explore that option first. always.

Brandon Croucier · Answer

Doing a Cashout Refinance using DSCR would be your best bet to tap into equity on this free and clear investment property.

Erik Estrada · Answer

Yes you can use the cash out proceeds to payoff a mortgage balance for an investment property since it is still qualified as business purpose use.

Dave Foster · Answer

@Dean Bergstrom, Depending on the "why" of doing the 1031 with a free and clear property you might also explore the option of simply taking out new debt on the 1031 property.  New debt as opposed to a refinance might get you more for less.

Jacob Sherman · Answer

DSCR refi cashout is most definitely an option . What is the scenario looking like ?

Gaetano Ciambriello · Answer

DSCR is a no-income verification loan. As long as the projected rental income is greater than your total PITI payment, the property will qualify. Interest rates will be 7.5 - 9%~

HELOCs on an investment property typically come at a higher interest rate (13-15%~). The benefit is you do not have to pull on the $$ right away and payments are interest only.

A conventional cash-out refinance could work if you can show income and there is no pre-payment penalty unlike a DSCR loan.