DCSR LOANS: Hottest Loan On The Market Today and why.
For Real Estate Professionals, with the real estate market transitioning, it is essential to focus on where the market movement is more active. Right now, we are have seen that interest rates have increased from the historic lows of 2008-2020 to current levels, and it is more difficult to qualify for a home loan, and as such the residential market as slowed somewhat. In recent months, Valor Lending Group has experienced an increased loan volume in DSCR Loans, also known as a Property Investment Loan. In as much, DSCR Loans have become the hottest Loan On The Market Today.
While most Real Estate Agents focus primarily on single-family residential properties and prospects, more buyers are looking for passive income while cutting their overhead expenses in 1-4 unit properties. Making a decisive choice to let the rents help supplement their income. For Realtors, marketing to this specific market niche can bridge a RE Professional’s business through this transition period.
Are your Clients looking to acquire a DSCR investment property loan? As a Loan Officer at Valor Lending Group I am here to help.
Here’s how to avoid using hard money and qualify for investment property acquisitions and refinances using the investment property’s cash flow.
Traditional mortgage lending requires tax returns during the approval process; a DSCR investment property loan does not.
Providing tax returns only sometimes portrays actual cash flow due to how traditional loans are underwritten (which often applies a default vacancy factor, minimum global debt service, and other guidelines and overlays). Real estate investors and others whose tax returns do not accurately portray their financial picture can use no-tax return investment property loans as a powerful financing solution.
A DSCR loan is an excellent option for real estate investors that allows qualification based on the cash flow of the subject property financed. If the rental property is cash flow positive, that will constitute sufficient qualifying income.
Here’s all you need to know about how a DSCR investment property loan works.
What is a DSCR Investment Property Loan? Sometimes called “Investment property loans” or “rental loans,” DSCR investment property loan does not consider a borrower’s income in the traditional sense.
The “cash flow” is the monthly rental amount the property brings in. For example, a property renting for $2,000/month would be considered a qualifying income of $2,000/month. The main requirement for these investment property loans is that the monthly rents cover the monthly expenses. It is that simple.
Not only is a borrower’s income not considered in the loan application process, but investment property lenders do not request income amounts. There is no income verification of any kind. Also, there is no need for No letters from employers, no W2s, and no pay stubs. Again, the investment property’s income is simply the property’s cash flow.
- Why Use a DSCR Investment Property Loan?
To determine monthly income, traditional mortgage lenders require tax returns, W-2s, and paycheck stubs. Salaried and hourly borrowers would need lenders to look at gross income for qualifying purposes. But for self-employed borrowers, traditional mortgage lenders look at net income, the adjusted gross income shown on tax returns. This medium puts real estate investors and other self-employed borrowers at a disadvantage.
However, rental loans are a great way for real estate investors to qualify for both acquisitions and refinance without requiring bank statements or tax returns and without having to allow using a debt-to-income ratio. (Bank statement loans are also an excellent option for self-employed borrowers, to learn more about bank statement loans, click here.)
Borrowers that fall outside traditional underwriting guidelines but are looking for long-term loans with more attractive rates than hard money loans can use the DSCR investment property loan to their advantage. These loans do not require tax returns, income or employment, or debt-to-income ratio calculations.
DSCR loans provide the flexibility and lessened documentation of hard money loans but with rates closer to traditional financing.
DSCR loans are a constantly evolving area of real estate financing that offers a powerful way to grow your real estate portfolio.
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- What Does a DSCR Investment Property Loan Consist of?
- DSCR – Debt Service Coverage Ratio
The Debt Service Coverage Ratio, or DSCR, is how investment property lenders qualify borrowers for a loan. In essence, it is a comparison of the property’s monthly rental income versus monthly expenses.
DSCR provides a basis for determining the maximum loan amount an investment property can withstand. The higher the DSCR, the bigger the mortgage the property qualifies for. The monthly rent covers the cost of five (5) monthly expenses of the property:
- HOA Dues (if any)
Together, these are often called the “PITIA.”
(b) Principal & Interest
The loan principal is the total loan amount plus any costs of the mortgage to be financed. Loans paid down over a set period (called “amortizing” loans) include monthly payments toward the loan principal.
Loans also often have an interest-only option, meaning payments are made towards interest only each month. In this case, The borrower will not pay any portion of the principal loan balance, just interest-only, during the interest-only period. Then, a balloon payment in the amount of the principal loan balance is due at the end of the loan term.
Comparatively, an amortized loan (i.e., when the principal & interest are in equal monthly installments) uses a mortgage calculator to determine the monthly principal and interest payments based on a given loan size, rate, and amortization term.
(c) Taxes, Insurance, & HOA Dues
The next portion of the debt component of the DSCR calculation consists of taxes, insurance, and HOA dues. These are self-explanatory. Calculate the monthly taxes and insurance for a refinance (or estimated monthly taxes and insurance quote for a purchase) and add in any HOA dues present.
The total monthly taxes, insurance, and HOA dues (if any) and the principal and interest payments make up all debts included in the no-tax return investment property loan DSCR equation. It’s that simple!
The property is rented for $2,000/month and has the following expenses
Principal & Interest $1,000/mo
Property Taxes are $250/mo
HOA Dues $130/mo
TOTAL PITIA $1,500/mo
In this example, the DSCR = $2,000 Monthly Rent / $1,500 Monthly PITIA = 1.33.
DSCR Lenders generally want to see DSCR above 1.00 and sometimes offer better pricing if the DSCR is above 1.25-1.50.
- Purchase v. Refinance
Use this loan for a purchase or a refinance of real property
Purchase provides a great way to qualify for a purchase loan without tax returns, income or employment, or historical bank statements.
Refinancing, using an investment property loan, can be used to tap into a property’s equity and “cash out” the property. For example, if the equity in a property increases, a real estate investor can obtain an investment property loan that provides discretionary cash available for any business purpose.
3) Down Payment, Rates & Costs
DSCR investment property loans are long-term solutions with terms of 15 or 30 years and can be fixed or adjustable.
The minimum down payment on an investment property loan is usually 20% (or a minimum of 20% equity for a refinance). Larger down payments do often allow for a better rate. Some lenders require up to 25% or more depending on credit, DSCR, and other factors, including a reserve requirement.
Relatives ac provide gift funds as long as the funds are only for the down payment, reserves, or closing costs.
Rates for investment property loans are generally higher than traditional loans (based on increased perceived risk to lenders). All other typical loan fees are similar, such as origination points, broker and lender fees, appraisals, title, escrow, etc.
CALL EMAIL David is happy to any questions you may have.
- Personal Credit
Although personal income and debts are not required for a
DSCR property loan, good personal credit is considered and required in the loan approval process. However, this requirement is typically no more scrutinized than a hard money loan.
Lenders want to see that a real estate investor can generally pay their bills on time. In addition, having more than 1 or 2 late mortgage payments in the previous year can often require a loan approval exception, which can sometimes delay the process.
- Advantages & Disadvantages
- No tax returns required
- No employment or income required
- NO Personal or business income required
- No debt-to-income (DTI) ratio required
- Allows real estate investors and self-employed individuals to qualify when they otherwise cannot
- Larger down payment than traditional loans
- Rates are slightly higher than traditional loans (but not much more)
- Some (but not all) lenders require landlord experience
- Personal credit still plays a role
- Finding the Best DSCR Investment Property Loan
Many rental property loan lenders need a retail channel, meaning they only fund loans using a broker. The best brokers spend many hours scouring thousands of loan programs to find their clients’ best rates and terms. It is in the broker’s best interest to find the lowest rate and most favorable terms available to close the deal.
If you are a real estate investor considering purchasing or refinancing a property, DSCR investment property loans are a great way to avoid hard money. See how this program can work for you. Click here to speak with a loan officer and get a quote.
- Bottom Line
DSCR investment property loans are a great way to avoid hard money with a viable long-term financing solution for real estate investors. The lessened documentation and underwriting requirements are similar to hard money loans, while rates and fees are more akin to traditional loans.
Whereas traditional mortgage lending requires tax returns during the loan approval process, investment property loans do not. With these loans, real estate investors can purchase or refinance a property with no employment required, no personal income considered, and no debt-to-income ratio developed.
The only cash flow that matters is the rental income. That’s it. If the property debt services, the property will qualify.
Speak to a mortgage professional at Valor Lending Group to discuss how you can qualify.
By: Gregory Riggs esq.
Speak to David Christie, Loan Officer at Valor Lending Group to discuss how you or your clients can qualify.
AT VALOR LENDING WE OFFER EVERY MORTGAGE LOAN IN THE BOOK
We fund nearly every loan in the book and with dedicated customer service. We assure you excellent communication throughout the loan process to ensure that your loan closes in a smooth and timely manner.
Recap of our Loan Products
- Hard Money Loans (20% down / minimal documentation) are Typically funded in 7-10 days.
- Stated Income Loans (Great for business owners and self-employed) No tax returns!
- 100% financing is available (we can cross-collateralize other properties if there is enough equity)
- Valor VA Home Loan 100% financing up to $1.5MM
- Rental Property Loan – No tax returns or DTI calculation! Based on the subject property’s cash flow – No DSCR Coverage is needed!
- Flipper & Rehab Loans (Flip a property with one of our many options)
- 2nd Position Loans up to $5mm
- Raw Land & Lot Loans
- Ground-up Construction for spec homes, custom homes, and commercial ground-up.
- Farms, Vineyards, Ranches, and Agricultural Properties (25-30% down)
- 10% down Jumbo’s up to $1.5mm
- Manufactured Housing / Mobile Homes (20% down / 600+ credit score)
- Acreage Properties
- Commercial Loans up to $500mm
- 3% & 5% down Conventional Loans– LPMI (Lender paid mortgage insurance)
- Foreign Nationals Loans (no social security or residency required)
Other Programs we Offer:
- Conventional Conforming Loans
- High Balance Conforming
- Jumbo Loan Financing |10% down Jumbo to $1.5mm
- FHA, USDA
- Reverse mortgages up to $1 Million in Value
- Cash-Out Refinancing
*Terms and conditions may change daily without notice
We look forward to the opportunity to serve you!
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