Tag Archive for: loan terms

How to Calculate a DSCR Loan

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Today we are going to discuss how to calculate a DSCR loan. First we need to answer the question, “what is a DSCR loan?” A DSCR (Debt Service Coverage Ratio) loan helps real estate investors qualify based on rental income, not personal income. But how do you calculate it? Let’s break it down step by step.

What Is DSCR?

DSCR stands for Debt Service Coverage Ratio. Lenders use it to see if a property makes enough rental income to cover the mortgage. A DSCR of 1.0 means the rental income equals the loan payment. A higher DSCR means more cash flow.

DSCR Formula

The formula is simple:

DSCR=1,500/1,200 or 1.25

Now, let’s go step by step.

First: Find Your Gross Rental Income

This is the monthly rent collected from the property. If the rent is $1,500 per month, that’s your starting number.

Second: Calculate Your Total Monthly Debt Payments

This includes:

  • Principal and interest on the loan
  • Property taxes
  • Homeowners insurance
  • HOA fees (if applicable)

For example, let’s say your loan payment (including taxes and insurance) is $1,200 per month.

Third: Plug the Numbers Into the Formula

Using our example:

DSCR=1,500/1,200 or 1.25

What Does Your DSCR Mean?

  • 1.25 or higher – Your property cash flows well. Most lenders approve DSCR loans above this number.
  • 1.0 to 1.24 – The property covers the loan but has little extra cash flow. Some lenders may approve, but rates might be higher.
  • Below 1.0 – The property does not make enough to cover the mortgage. A lender will likely decline the loan.

Why DSCR Matters

A higher DSCR means:
First, Easier loan approval
Second, Better loan terms
Finally, More cash flow for you

Ready to Calculate Your DSCR Loan?

Use this formula to check if your rental property qualifies for a DSCR loan. The higher your DSCR, the better your loan options. Want help? Contact us today to find out more!

Now, go run your numbers and see if your property qualifies!

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Keep an Eye Out: DSCR Loan under an LLC

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How to Get Better Rates and Terms with Your DSCR Loan

Today we are going to discuss some things to keep an eye out for when applying for a DSCR loan under and LLC. Plus, we’ll share some tips on avoiding common pitfalls investors face when dealing with DSCR loans and LLCs. When you’re looking into a DSCR loan for your investment property, there are a few things you need to watch out for, especially if you’re holding the property under an LLC. Even small details, like who’s involved in your LLC, can make a big difference in your loan’s rate and terms. 

The Importance of LLC Ownership and DSCR Loans

Owning your property under an LLC is great for DSCR loans, but you must be mindful of who is involved. In one case, a client who thought he was all set to get a great loan suddenly hit a major roadblock.

It turned out his partner owned 40% of the LLC, and the lender needed to consider the partner’s credit. Unfortunately, the partner’s score was even lower than the client’s, causing the rate to increase again.

Why does this happen? Lenders often require the credit checks of all LLC owners who hold a certain percentage of the company. In many cases, anyone owning 5% or more will have their credit checked. That means if someone in your LLC has a low score, it can drag down your chances of securing good loan terms.

How to Improve Your LLC for Better Rates and Terms

To avoid these issues, you need to carefully consider who is part of your LLC. Here are a few tips:

  • Check everyone’s credit before applying for a DSCR loan. If someone has a low score, it could hurt your chances.
  • Talk to your lender upfront. They can let you know if you’ll need to provide credit checks for all LLC members.
  • Consider adjusting ownership. If one member’s credit is a problem, you could temporarily remove them from the LLC while securing the loan. This process can take time, but it may help you secure a better deal.

In Conclusion

Securing a DSCR loan while using an LLC can offer great benefits, but it’s important to pay attention to the details, especially when it comes to ownership and credit scores. By keeping an eye on your credit usage, checking your LLC partners’ credit, and talking to your lender upfront, you can avoid surprises and get the best possible rates and terms. With the right approach, you’ll set yourself up for success on your investment journey! If you have any questions, we’re here to help!

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