If you’ve found that conventional or conforming property loans don’t fit your borrowing criteria, it may be time to look at DSCR loans.
The world of finance and lending has various types of loans available for borrowers—each suiting different financial needs and goals. The Debt Service Coverage Ratio (DSCR) loan is one such loan type that has gained popularity in recent years.
Why has this loan gained sudden interest for those in real estate investment?
Let’s take a look at DSCR loans, their benefits, and how they stack up against conventional loans.Get Started with Park Place Finance
A DSCR loan is a type of the investment property loan that focuses on the cash flow (i.e., rental income) of the property being financed instead of the borrower’s personal income and credit history.
This type of loan is used for long-term investment properties. Lenders assess the property’s ability to generate income and cover the mortgage payments rather than the borrower’s personal financial situation.
A DSCR mortgage lender will calculate the property’s potential income and expenses to determine if the borrower’s choice of property can adequately cover the mortgage payments.
The DSCR ratio is calculated by dividing the property’s net operating income (NOI) by the total debt service, which includes mortgage payments, taxes, and insurance.
A higher ratio (the resulting number) indicates a more financially stable property, making it a more attractive option for DSCR mortgage lenders. A DSCR ratio of 1.0 means an investor is breaking even.
There are several benefits to choosing a DSCR loan over other loan types. The following are the two biggest advantages.
Because DSCR loans do not rely on traditional underwriting guidelines, they allow for superior flexibility that can be advantageous for borrowers with unconventional income sources or a weaker credit profile. Lenders do not require pay stubs or W-2’s to qualify.
This type of underwriting—emphasizing the property’s income potential over personal finances—has the potential to open new opportunities for investors looking to expand a real estate portfolio.
Relying primarily on property cash flow, the DSCR approval process tends to be quicker than conventional loans, eliminating the need for extensive documentation and verification of the borrower’s financial information. Most properties close in 2-3 weeks.
If time is a factor—likely when you deal with a competitive real estate market—then the slow pace of the conventional mortgage lending process may easily mean you lose out on the property you want.
These loans are the most common type of mortgages. Specific credit, income, and down payment requirements are set for borrowers and must be met to be approved.
Conventional loans are generally more stringent in their underwriting guidelines than DSCR loans, placing a greater emphasis on the borrower’s personal financial situation.
Therefore, borrowers with lower credit scores or higher debt-to-income ratios may have difficulty qualifying for a conventional loan.
As we’ve shown, the primary difference between DSCR and conventional loans lies in their underwriting guidelines—where DSCR mortgage lenders will focus on the property’s expected cash flow instead of the borrower’s financials.
Other differences include the following.
DSCR loans are primarily used for long-term rentals. Conversely, conventional loans can be used for a much wider variety of properties, including primary residences, second homes, and investment properties.
Due to the increased risk associated with DSCR loans, interest rates may be higher than conventional loans. However, investors are still attracted to these deals by the potential income generated by the property.
DSCR loans often require a higher down payment than conventional loans, as lenders want to ensure that borrowers have a significant financial stake in the property. However, conventional mortgages require a down payment of 20% or more if you want to avoid paying for private mortgage insurance (PMI), so it is comparable to the down payment required for a DSCR loan.
Beyond comparing their rates and fees, here are some tips for finding the right DSCR mortgage lender for your needs.
Search for a lender with experience in DSCR loans and a deep understanding of this loan type’s unique underwriting guidelines and requirements. Any lender can jump on the bandwagon but some lenders specialize in this product. Inquire further about your lender’s experience with DSCR loans.
Research the lender’s reputation in the industry and read customer reviews to get a sense of their commitment to customer satisfaction and service. If reviews aren’t posted on their website, check Google reviews or search their NMLS number on sites like Bankrate or Consumer Affairs.
Once you’ve found the DSCR mortgage lender you want, here are some things to keep in mind to help ensure a smooth loan process.
Gather all necessary documentation related to the property’s income and expenses, as well as your personal financial situation, to speed up the loan application process.
Don’t be afraid to ask for details regarding the loan terms, interest rates, and fees associated with the loan. A reputable lender should be transparent and willing to answer any questions you may have.
Keeping track of your rental income and the documentation during the application process will help both you and your lender avoid misunderstandings and potential pitfalls.
DSCR loans offer a flexible and attractive financing option for investors looking to purchase investment properties with strong cash flow potential.
By doing your research and working with a knowledgeable mortgage professional, you can unlock the potential of DSCR loans and find the perfect fit for your financial needs.
If you’re looking for a DSCR mortgage lender that offers speed, responsive service, and straightforward loan products, consider Park Place Finance.
Our experienced team of mortgage professionals can guide you through the loan application process and help you secure the financing you need and achieve your real estate investment goals. Contact us today at (866) 407-1599 to learn more!Get Started with Park Place Finance