Thoughts on DSCR Loans

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Alex BreshearsBusiness Member
Lender · Springfield, MO · Member since 2020 · 351 posts · 504 votes
4y

Hi Tim! Welcome to real estate investing! Now DSCR loans are loans that are looking primarily at the asset to pay for the liability of the mortgage. They are termed Debt Service Coverage Ratio. For investment properties, they are looking at the amount of income generated compared to the debt service on the loan. Right now, their interest rates are really high. There is a lot of uncertainty in the market for institutional capital, which funds a lot of these types of loans. For investment property, I would say commonly you are going to have 80% to 75% LTV. They may or may not require underwriting on you as a person, including credit checks, asset levels, etc. On the plus side, if the property cash flows with a DSCR loan, when it comes time to refinance time with a lower rate it will improve on cash flow lol. This is generally going to be a loan product for a long term buy and hold property.

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  • Alex BreshearsBusiness Member
    Lender · Springfield, MO · Member since 2020 · 351 posts · 504 votes
    4y

    Hi Tim! Welcome to real estate investing! Now DSCR loans are loans that are looking primarily at the asset to pay for the liability of the mortgage. They are termed Debt Service Coverage Ratio. For investment properties, they are looking at the amount of income generated compared to the debt service on the loan. Right now, their interest rates are really high. There is a lot of uncertainty in the market for institutional capital, which funds a lot of these types of loans. For investment property, I would say commonly you are going to have 80% to 75% LTV. They may or may not require underwriting on you as a person, including credit checks, asset levels, etc. On the plus side, if the property cash flows with a DSCR loan, when it comes time to refinance time with a lower rate it will improve on cash flow lol. This is generally going to be a loan product for a long term buy and hold property.

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  • Katherine Blazer
    Lender · Tampa/St. Petersburg/Sarasota FL and Knoxville/Sevierville/Maryville, TN · Member since 2018 · 361 posts · 178 votes
    4y

    I love them! They are a great way to scale your business.

    They are asset-based loans as opposed to borrower based. So pending that the investor has decent credit and reserves to support, they do not care what your taxes look like. It is all about will the property support itself... isn't that what all investors are looking for anyway? You will pay upfront points for the "risk" the banks take for not digging into the borrower's ability to pay. You can find interest rates similar to where conventional investment loans are. You are closing these loans in an LLC or other entity. If you are working with the right team they close a lot more quickly than traditional loans.

    7Reply
  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    4y

    We use DSCR loans all the time.

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  • Demon S Rogers
    Member since 2021 · 61 posts · 14 votes
    4y

    @Alex Breshears @Shiloh Lundahl what are typically the requirements for these types of loans ?

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  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    4y

    Typically the property needs to produce 25% more cash flow than the expenses and the loan goes up to 75% of the value.

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    4y
    Quote from @Demon S Rogers:

    @Alex Breshears @Shiloh Lundahl what are typically the requirements for these types of loans ?


    Property ownership history, moderate to great credit, and a few other things but nothing too crazy. There is a NO DSCR programs available and options that do not require you to own any properties. Also some lenders can do short-term rentals.

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  • Lien VuongBusiness Member
    Real Estate Agent · Boston, MA · Member since 2018 · 2k+ posts · 1k+ votes
    4y

    I love it because it does not factor in my Debt to Income and just qualifies the property. Win-win. 

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  • Jason Norton
    Specialist · Huntsville, AL · Member since 2020 · 96 posts · 35 votes
    4y

    Very simple. I can answer any question.

    0Reply
  • Beth JohnsonPro Member
    Lender · Renton, WA · Member since 2018 · 215 posts · 216 votes
    4y

    @Tim Melin

    Pro - didn't take into consideration personal income or debt.

    Con - stiff prepayment penalties that are typically a 5-yr step down and the rates have gone up considerably in the last two months making them a poor option at the moment if you believe rates will go down in the next year or two. Longer bridge loans up to 2-3 yrs aren't much more interest rate wise anymore and don't have prepayment penalties.

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  • Chad McMahan
    Residential Real Estate Broker · Sedona, AZ · Member since 2017 · 751 posts · 504 votes
    4y
    Quote from @Tim Melin:

    Any experience with DSCR funding. Looking for the pro/cons for a new investor


    I have used DSCR loans to fund 20 closings in just the last 3 months. Most were my clients, and some were personal purchases. They are great, as long as the appraisal is AS-IS based, rather than ARV based. Lots of problems surface in the 11th hour with ARV based appraisals.

    1Reply
  • Da'Shawn Murphy
    Investor · Cleveland, OH · Member since 2020 · 33 posts · 24 votes
    4y

    @Chad McMahan Hey Chad, what have you seen as an outcome if the appraisal comes back not in your favor, in terms of needing repairs?

    0Reply
  • Chad McMahan
    Residential Real Estate Broker · Sedona, AZ · Member since 2017 · 751 posts · 504 votes
    4y
    Quote from @Da'Shawn Murphy:

    @Chad McMahan Hey Chad, what have you seen as an outcome if the appraisal comes back not in your favor, in terms of needing repairs?

    Hi Da'Shawn.
    To better clarify, the issue with ARV appraisal based DSCR programs, is that it's actually 2 appraisals in 1.

    1st, the appraiser has to identify the AS-IS value. If this comes in low, this decreases your LTV. Often times these larger projects look rough, even if there shouldn't be a value problem (should as-is appraise at PP or higher) at purchase price. Because of this, unsophisticated appraisers reduce as-is value more than they should.

    2nd, the appraiser estimates the increase of value, based on your remodel plan. For most appraisers this is too much work and overwhelming. As a result (at least in my area) most appraisers rush this process and give something like 112% value for remodel- which is utterly ludicrous, as our remodels are enormously leveraged and should give closer to 300% value.
    And with these ARV based DSCR programs, you need a high ARV dollar amount, or else they further drop your LTV. End result- even if they estimated 80%-90% LTV for PP upfront, due to one or both appraisal values coming in low, you have to close escrow at closer to 65% LTV. In my area, that's a difference of at least $50,000-$100,000, and in Sedona, a difference of $150,000-$450,000

    Ironically, most of these ARV based DSRC lenders have done a GREAT job. However, because it's tied to a ARV based appraisal, the result is out of their hands- in terms of LTV. Also, because this appraisal is more work for the appraiser and causes them more stress, 80% of the time these ARV based appraisals are running 1-2 weeks later than the turn-in deadline. Brutal.

    SOLUTION:

    I recommend AS-IS based DSCR programs that do not order/require ARV based appraisals (and only require as-is based appraisals). This is a simple solution and there a ton of these programs out there. Be very clear with your lender rep about this point, and see what, if any options, are available with this outcome.

    If anyone would like a recommendation for a as-is based DSCR provider that I've had the most success with, please reach out privately.

    Disclaimer:

    Of course as-is appraisals can also value lower than purchase price. The results would still be a lowered LTV. However, these as-is based appraisals are the bread and butter appraisal they are used to doing, and you will more often see on-time appraisals, and a MUCH higher percentage of at or above purchase price appraisals, than with the ARV based valuations.

    3Reply
  • Jamie Small
    Member since 2022 · 3 posts · 7 votes
    4y

    DSCR Loans are a great tool that helps a ton of our clients with their buy and hold investment properties. A few of the highlights would be:

    Not needing to use your personal income or tax returns to qualify- just the income of the property. Many lenders will require a 1.25 DSCR to qualify for a DSCR mortgage loan but we can go down to .75 ratio or sometimes even lower. Interest rates are better on DSCR ratios of 1 or above and a DSCR ratio of less than 1 *typically* requires 12 months of reserves.

    Interest rates are higher than conventional, but much less than hard money if you plan to keep the investment long term.

    There are also interest only, or ARM options that help keep payments low/cashflow higher during a variable market.

    4Reply
  • Kevin Woodard
    Lender · Nationwide · Member since 2021 · 220 posts · 105 votes
    4y

    With regard to scaling, they are not reported to the bureaus (at least the products I am familiar with are not). So if you are running into problems with taking out loans in your name this solves that problem. If you are to the point where you are feeling the effects of too many personal loans, you will start seeing the ability to qualify with a conventional product becoming more difficult. You will take a hit on the rate if you can get a loan at all, I saw it recently (6 personal loans in 1 year and the borrower couldn't get the 7th.) 

    They are more aligned with fed action and the secondary market, so DSCR will follow rate trends. They are very more dependent on leverage and your credit score. Hope this helps!

    0Reply
  • Ocean Van
    SoCal · Member since 2016 · 4 posts · 1 vote
    4y

    Does DSCR require the property to have tenants already to qualify for the 1.25 ratio? I'm thinking about using a HELOC to acquire the property and then refinance to pay back the balance. Can I refinance to a DSCR loan? Does the DSCR rate less than HELOC rate, mine is prime + 0.75% (5.5% as of today)?

    0Reply
  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    4y
    Quote from @Ocean Van:

    Does DSCR require the property to have tenants already to qualify for the 1.25 ratio? I'm thinking about using a HELOC to acquire the property and then refinance to pay back the balance. Can I refinance to a DSCR loan? Does the DSCR rate less than HELOC rate, mine is prime + 0.75% (5.5% as of today)?


    It depends on the lender, but in general, no, they can be vacant. The appraiser will provide a comp rent schedule that sets the rent amount for the DSCR number.

    0Reply
  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    4y
    Quote from @Kevin Woodard:

    With regard to scaling, they are not reported to the bureaus (at least the products I am familiar with are not). So if you are running into problems with taking out loans in your name this solves that problem. If you are to the point where you are feeling the effects of too many personal loans, you will start seeing the ability to qualify with a conventional product becoming more difficult. You will take a hit on the rate if you can get a loan at all, I saw it recently (6 personal loans in 1 year and the borrower couldn't get the 7th.) 

    They are more aligned with fed action and the secondary market, so DSCR will follow rate trends. They are very more dependent on leverage and your credit score. Hope this helps!


    While the DSCR loans do not report to the bureaus, they are typically personally guaranteed. Down the road, if the borrower is in a different situation and they want to use conventional financing, the loans that they personally guaranteed will count against their 10 properties financed when a conventional underwriter pulls a drive report. It's a background check of sorts. DSCR loans are great, but it's a misconception to think they will not count against their max limit of properties financed for conventional financing.

    2Reply
  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    4y

    They're a great way to scale your business and pull out money for a BRRRR

    They’re really expensive 

    2Reply
  • Elisa Waldman
    Investor · Charlotte, NC · Member since 2016 · 8 posts · 2 votes
    4y
    Quote from @Shiloh Lundahl:

    We use DSCR loans all the time.


     Hi Shiloh,

    In your experience, who are some good DSCR lenders?

    Best Wishes

    0Reply
  • Elisa Waldman
    Investor · Charlotte, NC · Member since 2016 · 8 posts · 2 votes
    4y
    Quote from @Jamie Small:

    DSCR Loans are a great tool that helps a ton of our clients with their buy and hold investment properties. A few of the highlights would be:

    Not needing to use your personal income or tax returns to qualify- just the income of the property. Many lenders will require a 1.25 DSCR to qualify for a DSCR mortgage loan but we can go down to .75 ratio or sometimes even lower. Interest rates are better on DSCR ratios of 1 or above and a DSCR ratio of less than 1 *typically* requires 12 months of reserves.

    Interest rates are higher than conventional, but much less than hard money if you plan to keep the investment long term.

    There are also interest only, or ARM options that help keep payments low/cashflow higher during a variable market.


    Who are some really good DSCR lenders? Are you familiar with any that will do a short term land/build then convert to 30 year fixed?

    0Reply
  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    4y
    Quote from @Elisa Waldman:
    Quote from @Jamie Small:

    DSCR Loans are a great tool that helps a ton of our clients with their buy and hold investment properties. A few of the highlights would be:

    Not needing to use your personal income or tax returns to qualify- just the income of the property. Many lenders will require a 1.25 DSCR to qualify for a DSCR mortgage loan but we can go down to .75 ratio or sometimes even lower. Interest rates are better on DSCR ratios of 1 or above and a DSCR ratio of less than 1 *typically* requires 12 months of reserves.

    Interest rates are higher than conventional, but much less than hard money if you plan to keep the investment long term.

    There are also interest only, or ARM options that help keep payments low/cashflow higher during a variable market.


    Who are some really good DSCR lenders? Are you familiar with any that will do a short term land/build then convert to 30 year fixed?


    You really need a DSCR broker rather than a lender. When using a lender, you'd be locked into their specific guidelines and sometimes, that's not the best for you. Having a good broker that can tailor the loan to your specific situation is better because they will weed out the lenders that may not go down to your loan amount or may require seasoning of funds or may not allow short term rentals etc...

    1Reply
  • Michael Mastantuono
    Realtor · PHX AZ · Member since 2017 · 47 posts · 20 votes
    4y
    Quote from @Alex Breshears:

    Hi Tim! Welcome to real estate investing! Now DSCR loans are loans that are looking primarily at the asset to pay for the liability of the mortgage. They are termed Debt Service Coverage Ratio. For investment properties, they are looking at the amount of income generated compared to the debt service on the loan. Right now, their interest rates are really high. There is a lot of uncertainty in the market for institutional capital, which funds a lot of these types of loans. For investment property, I would say commonly you are going to have 80% to 75% LTV. They may or may not require underwriting on you as a person, including credit checks, asset levels, etc. On the plus side, if the property cash flows with a DSCR loan, when it comes time to refinance time with a lower rate it will improve on cash flow lol. This is generally going to be a loan product for a long term buy and hold property.


    0Reply
  • Michael Mastantuono
    Realtor · PHX AZ · Member since 2017 · 47 posts · 20 votes
    4y

    Hello, Regarding using DSCR loans for small multifamily units (4units and less), If you are able to add value to the extent that a refi is possible, will that refi still be from a DSCR lender? Or, do you need to show additional income and credit history if you try to get into a convention 30 year loan?

    0Reply
  • Richard Patrie
    Morrisonville, NY · Member since 2013 · 61 posts · 46 votes
    4y

    Very few lenders will lend up here due to it's "rural" classification. It's been a struggle. Those that do have increased requirements and lower LTVs. I've been relegated to rely on private money and owner financing. My advice is to keep your steady job and rely on small, local banks. 

    0Reply
  • Drake Shadwell
    Real Estate Agent · Orlando, FL · Member since 2022 · 7 posts · 6 votes
    3y

    There is a lot of great advice and detail on the requirements for DSCR in here and one small detail that I haven't seen mentioned - You have to already have a primary residence. I know it's probably rare for someone to be looking to buy an investment property before their own residential. I ran into this issue because I had made enough for the 20% down payment but hadn't been an agent for more than 2 years, so I couldn't get a conventional loan with my DTI. I thought DSCR could be the answer and planned to rent it out until I was able to qualify for a conventional so I could move in as my primary, but unfortunately it didn't work out.

    Very specific circumstance, but thought it was worth mentioning!

    0Reply
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