DSCR vs Conventional

Fort Worth, Texas
Private Lending & Conventional Mortgage Advice
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DSCR vs Conventional

Jeremy Shaffer
Member since 2020 · 2 posts · 4 votes

Currently looking at buying a duplex in the Fort Worth area. I have 1 rental property at the moment. I am wondering if I should do a DSCR for the new property, that will cash flow vs a conventional. Is DSCR simply worth it for the convenience and the fact that I will likely refinance in 5 + years when the 5 year pre-pay penalties are gone and rates are hopefully lower.

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Carrie Matuga
Lender · Riverside, CA · Member since 2017 · 248 posts · 98 votes
3y

@Jeremy Shaffer DSCRs typically have fairly stiff prepayment penalties and come with rates that are 1-1.5% higher than conventional. That said there are some huge advantages, too:

- Quicker closing times

- No income or DTI ratios

- No loan count limits

- Owned by your entity and don't appear on your own credit

I personally always use DSCR loans for my buy and hold properties because of the flexibility, Feel free to DM me and we can talk about your property.

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  • Alex Hunt
    Lender · Member since 2022 · 441 posts · 134 votes
    3y

    Hi Jeremey

    Fort Worth is a great location to purchase.

    I recommend A (DSCR) loan for the reasons listed below. Feel free to send me a DM and we can look at the property together,

    1. Cash Flow Security: DSCR loans ensure your rental income covers expenses, providing immediate positive cash flow.
    2. Portfolio Expansion: Easier access to financing can accelerate your real estate investment portfolio growth.
    3. Flexible Qualification: DSCR loans focus on property viability, not just personal finances, making qualification more accessible.
    4. Long-Term Strategy: Ideal for long-term investors, you can potentially refinance at lower rates after pre-payment penalties expires like you mentioned. 

    Conventional loans might be suitable if you prioritize lower upfront costs and plan to hold the property for a shorter period but typically DSCR is your easier option.

    Feel free to send me a DM and I can take a look at the property. 
    *

     

    0Reply
  • Givo Aghasi
    Lender · Los Angeles, CA · Member since 2022 · 238 posts · 73 votes
    3y

    @Jeremy Shaffer You can select a DSCR option with 1 year prepayment penalty. Typically, investors use this option for the convenience. Here are some others reason why:
    ◾Potentially quicker closing times
    ◾No income or job history verification required
    ◾No limit on the number of properties
    ◾Interest-only loan option available
    ◾Suited for new and seasoned real estate investors
    ◾Both long-term and short-term rentals are eligible (Airbnb, VRBO, etc.)
    ◾Close in the name of your LLC

    0Reply
  • Carrie Matuga
    Lender · Riverside, CA · Member since 2017 · 248 posts · 98 votes
    3y

    @Jeremy Shaffer DSCRs typically have fairly stiff prepayment penalties and come with rates that are 1-1.5% higher than conventional. That said there are some huge advantages, too:

    - Quicker closing times

    - No income or DTI ratios

    - No loan count limits

    - Owned by your entity and don't appear on your own credit

    I personally always use DSCR loans for my buy and hold properties because of the flexibility, Feel free to DM me and we can talk about your property.

    3Reply
  • Jeremy Shaffer
    OP
    Member since 2020 · 2 posts · 4 votes
    3y

    Thnx all, I was leaning DSCR and this helped a lot!

    0Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    3y

    @Jeremy Shaffer

    I'm in the Fort Worth area too. I just did a DSCR loan for a SFR in Arlington last week. It was my 4th DSCR loan and I love them. So easy to do and zero hassle since these are no doc loans. I did a 3 year prepayment penalty in case rates come down by then or I want to do a cash out refi to pull equity out within 5 years to scale up.

    2Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    3y

    don't assume you'll be able to refinance.

    1Reply
  • Jennifer Volek
    Real Estate Agent · Arlington, TX · Member since 2016 · 151 posts · 54 votes
    3y

    If it will cash flow at DSCR then I would go with that! DSCR is awesome and if you have the ability to cash flow then I would always go that route. I am curious about how it cash flows at DSCR but not Conventional? I have been looking into DSCR loans and usually the rate is higher, I would love to know who your lender is if you dont mind sharing.

    1Reply
  • Danielle Davenport
    Real Estate Broker · Los Gatos · Member since 2020 · 74 posts · 16 votes
    3y

    I have a great lead on several off market investment opportunities in Ft Worth. My investor is offloading his entire portfolio - connect with me ...

    0Reply
  • Frank Preciado
    Lender · Phoenix, AZ · Member since 2023 · 25 posts · 6 votes
    3y

    Make sure to shop around if you decide to go DSCR, there are ones that specialize on higher end investors (credit/financials) that can give you rates similar to conv with no prepay.

    0Reply
  • Jay HurstBusiness Member
    Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
    3y
    Quote from @Jeremy Shaffer:

    Currently looking at buying a duplex in the Fort Worth area. I have 1 rental property at the moment. I am wondering if I should do a DSCR for the new property, that will cash flow vs a conventional. Is DSCR simply worth it for the convenience and the fact that I will likely refinance in 5 + years when the 5 year pre-pay penalties are gone and rates are hopefully lower.

    @Jeremy Schaeffer if you decide to go with a DSCR there is no reason to have to pay for a 5 year pre-pay. But, the only difference between dscr and conventional underwriting is that you have to provide tax returns, two pay stubs and your W-2's for a conventional loan. It WILL save you money. DSCR are not no doc loans as you still have to show assets\ and your credit still matters etc.

    It is VERY important to work with someone that has a NMLS number. If they do not that means they can ONLY sell you a DSCR loan. so, of course, the DSCR will always be the best option in their eyes as it is the only option.

    Hurst Real Estate, INC4.991 Reviews
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    1Reply
  • Brandy Robinson
    Fort Worth, TX · Member since 2015 · 2 posts · 1 vote
    3y

    @Dani Davenport

    Hi Dani,

    I would be interested in learning more about these properties.

    Brandy

    0Reply
  • Stacy RaskinBusiness Member
    Lender · Member since 2022 · 1k+ posts · 503 votes
    3y

    DSCR loans have less papework compared to conventional loans.

    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? Is your DSCR ratio greater than 1-meaning are you cash flowing. 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.

    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

    This property cash flows. 

    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.

    [email protected]818-770-0340
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    3Reply
  • Chad McMahan
    Residential Real Estate Broker · Sedona, AZ · Member since 2017 · 751 posts · 504 votes
    3y
    Quote from @Jeremy Shaffer:

    Currently looking at buying a duplex in the Fort Worth area. I have 1 rental property at the moment. I am wondering if I should do a DSCR for the new property, that will cash flow vs a conventional. Is DSCR simply worth it for the convenience and the fact that I will likely refinance in 5 + years when the 5 year pre-pay penalties are gone and rates are hopefully lower.

    If you can get better terms with DSCR, then go with it. Usually DSCR terms are worse, and most people choose DSCR because they have DTI and/or credit issues. Sometimes, I also finance DSCR if a property won't qualify with traditional financing.

    Sometimes I also go with worse terms via DSCR, if it means a much faster close of escrow, so my offer feels stronger to the seller. I do this especially in a hotter sellers' market.

    1Reply
  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    7h

    DSCRs are worth it if you cannot qualify for conventional financing. Most lenders have flexible underwriting guidelines and there is generally less documentation required to qualify.

    The longer prepays is a huge sticking point for most investors. I would opt for a shorter PPP and get a higher rate if your goal is to try to qualify for a conventional loan in the future or refi again when rates improve.

    [email protected]818-269-7983
    LuxePrivate Investments LLC 572 Reviews
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    0Reply
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