Tag Archive for: The DSCR Company

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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Housing Market Bubble

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The housing market is in a dangerous spot, warns Reventure CEO Nick Gerli. According to him, the current housing market bubble is the biggest we’ve ever seen. It’s even larger than the one in 2006. The problem is that housing prices are too high compared to average incomes, making homes less affordable. Gerli suggests that prices will have to drop, or inflation will keep rising, which could cause even more problems.

For example, homes are now priced at 4.5 times the average income, which has only happened twice before – in 2006 and the early 1950s. Back in the 1950s, it took a decade of flat housing prices and growing incomes to fix things, but Gerli doesn’t see that happening this time.

Some states, like Florida, Tennessee, and Texas, are experiencing the biggest bubbles because housing prices there have shot up much faster than local incomes. On the flip side, places like New York and Illinois are less affected, as more people can afford homes, leading to tighter inventory.

The key to solving this might be increasing the number of homes for sale and slowing down rising mortgage rates. Experts, however, believe it’s best to lower rates gradually to give buyers a better chance. For now, though, many Americans are still struggling to find affordable housing solutions in an increasingly expensive market.

To see the complete article, please see the link below:

Housing Market In ‘Biggest Bubble Of All Time,’ Warns Reventure CEO: ‘This Situation Is Not Sustainable’

We are here to help! Contact us today!

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Quickly Calculate DSCR Today

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Are you looking to know if your property will cash flow using a DSCR loan? Let’s break it down so you can quickly calculate the Debt Service Coverage Ratio (DSCR) on your next deal.

What Is DSCR?

The DSCR is a ratio lenders use to see if your property is making money or losing it each month. It’s a simple way to check if your property is cash flowing positively or negatively.

When you see a DSCR higher than 1, it means your property is making money. However, a number lower than 1 means it’s costing you money. For example, if your DSCR is 1.25, your property brings in 25% more income than it costs. Therefore, if it’s 0.94, it’s losing a bit each month.

How to Calculate DSCR

Luckily, the formula for DSCR is easy. All you need to do is divide the property’s income by its expenses.

Here’s the formula:

DSCR = Income ÷ Expenses

Now, let’s break this down step by step:

  1. Income: This is how much you’re collecting in rent.
  2. Expenses: Add up these four things:
    • Your monthly mortgage payment
    • Property taxes
    • Insurance
    • HOA fees (if any)

DSCR Calculation Example

Let’s look at a quick example to make this clear.

Say you own a rental property. Here’s how much it’s bringing in and costing:

  • Rent (Income): $1,700 per month
  • Mortgage: $1,290 per month
  • Taxes: $100 per month
  • Insurance: $100 per month
  • HOA: $100 per month

First, total your expenses:

  • Expenses: $1,290 + $100 + $100 + $100 = $1,590

Next, divide the rent by the expenses:

  • DSCR: $1,700 ÷ $1,590 = 1.07

With a DSCR of 1.07, this property is cash-flow positive. Therefore, you’re making money each month!

What If the DSCR Is Below 1?

Let’s say the rent is only $1,500 per month instead of $1,700. Here’s what happens:

  • Rent (Income): $1,500 per month
  • Expenses: $1,590

Now, divide the rent by the expenses:

  • DSCR: $1,500 ÷ $1,590 = 0.94

In this case, your DSCR is below 1, which means you’re losing money. To clarify, each month, you’ll need to pay $90 out of pocket to cover the costs.

Higher DSCR Means Better Rates

Here’s another example where the rent is higher. Let’s say you’re getting $2,000 per month in rent:

  • Rent (Income): $2,000 per month
  • Expenses: $1,590

Now, divide the rent by the expenses:

  • DSCR: $2,000 ÷ $1,590 = 1.26

A DSCR of 1.26 means your property is bringing in 26% more income than the expenses. Not only does this make your cash flow better, but it can also help you secure a lower interest rate.

Why Does DSCR Matter?

Lenders care about DSCR because they want to be sure your property is self-sustaining. If it’s not, they’ll see it as a risk. A higher DSCR can mean a better interest rate, which puts more money in your pocket. For example, a DSCR of 1.25 could get you a lower rate than a break-even DSCR of 1.0.

Imagine the impact of a lower interest rate across several properties. If your DSCR helps you save $220 a month, that’s $2,640 a year. If you have five properties, that’s over $13,000 in savings!

Final Tips to Quickly Calculate DSCR

Before you buy, check the DSCR to make sure the property will cash flow like you want it to. Here’s how:

  1. Estimate the rent based on similar properties in the area.
  2. Calculate your monthly mortgage payment, taxes, insurance, and HOA (if applicable).
  3. Run the numbers using the simple DSCR formula.
  4. Check that your DSCR is above 1 to ensure you’ll have positive cash flow.
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Why You Need a DSCR Loan in Today’s Market

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Today we are going to discuss why you need a DSCR loan in today’s market. Finding the right loan can make or break your investment strategy. For many investors, the DSCR loan is the perfect tool. Whether you’re just starting out or have been in the game for a while, DSCR loans offer a unique advantage that other loans don’t.

What is a DSCR Loan?

DSCR stands for Debt Service Coverage Ratio. But here’s the part that makes it stand out—it’s what we often call the “no income loan.” Unlike other loans that ask for your personal or business income, the DSCR loan only cares about the income your property generates. Imagine this: You don’t have to worry if you just started a business, are unemployed, or have written everything off on your taxes. The DSCR loan doesn’t ask for tax returns, employment verification, or personal income. That’s why it’s perfect for investors who might not show a lot of income on paper but have solid, cash-flowing properties.

Why DSCR Loans Work for Real Estate Investors.

Investors love DSCR loans because they are tailored specifically for rental properties that generate income. These loans are quick and simple compared to conventional loans because they avoid all the hassle of verifying your personal finances.

  1. No Personal Income Needed
    You don’t have to show income documents like tax returns or employment verification. It doesn’t matter if you’re new to real estate or have been writing off all your expenses—you can still qualify.
  2. Based on Property Income
    The main qualification is whether the property can cash flow. The lender looks at whether the property can cover its basic expenses: mortgage, taxes, insurance, HOA, and flood insurance. If the property pays these bills with its rental income, you’re good to go!
  3. Great for Rental-Ready Properties
    DSCR loans are designed for rental-ready properties, meaning you can move tenants in right away. They are not for fix-and-flip projects or properties needing major repairs. If the property is already in good shape, DSCR is a great option to start generating cash flow.

The Catch (If You Can Call It That).

Now, you might be wondering—what’s the catch? The only real limitation is that the property must be rental-ready. DSCR loans aren’t for properties that need a lot of work. If you’re looking at a fixer-upper, you’ll need to explore other loan types. DSCR loans focus on properties that can start making money immediately. Plus, these loans are only for rental properties, not properties where you plan to live. For example, if you want to buy a duplex, live in one half, and rent out the other, a DSCR loan won’t work.

Why DSCR Loans Are Beating Conventional Loans.

Here’s another reason to consider a DSCR loan: they’re now often cheaper than conventional loans. Traditionally, DSCR loans had slightly higher interest rates, but that has changed. In today’s market, over 70% of DSCR loans are coming in with rates lower than conventional loans. Why? Because DSCR loans are tied to different financial indexes, making them less affected by inflation and federal rate hikes. This means you can get the best of both worlds—a loan that doesn’t touch your personal finances and one that could offer you a better rate than a standard loan.

A Tool for Investors Looking to Grow.

If you’re an investor looking to buy and hold rental properties, a DSCR loan can help you grow your portfolio faster. Whether you’re buying single-family homes or multi-unit properties, this loan is designed to help you scale up without the usual roadblocks. And, if you’re curious about whether a property qualifies, contact us today! We are happy to help get you on the path of success.

In Conclusion.

Why do you need a DSCR loan in today’s market? DSCR loans are the ultimate tool for real estate investors in today’s market. Whether you’re just starting out or a seasoned pro who writes everything off, this loan can help you accumulate rental properties and grow your cash flow quickly. With rates often better than conventional loans and a simple qualification process, it’s no wonder so many investors are turning to DSCR loans.

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DSCR Loans and Credit Scores: What You Need to Know

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Investing in real estate can be an exciting journey. But, when it comes to financing, things can get a bit tricky—especially if your credit score isn’t where it needs to be. Don’t worry, though! There are ways to improve your situation and get the best possible terms on a DSCR loan. Today we are going to discuss DSCR loans and credit scores! Let’s take a closer look!

What is a DSCR Loan?

First things first, what is a DSCR loan? DSCR stands for Debt Service Coverage Ratio. In simple terms, it’s a type of loan used by real estate investors. This loan measures the ability of a property’s cash flow to cover its debt. In other words, lenders use the DSCR to see if your rental income is enough to pay off the loan you’re asking for.

Why Credit Scores Matter for DSCR Loans

Your credit score plays a huge role in getting approved for a DSCR loan. A higher credit score means you’re more likely to get better loan terms, like a lower interest rate or a higher loan-to-value ratio (LTV). On the flip side, a lower credit score can make it harder to qualify, or it may result in less favorable terms.

Example:

Imagine you have a credit score of 680 and want to finance 80% of a $312,000 property. You might get an interest rate of 8.8%. But if your credit score were 760, you could lock in a rate as low as 7.45%. That difference could save you over $200 a month!

The Credit Usage Problem

One of the biggest factors affecting your credit score is how much of your available credit you’re using—this is called your credit utilization rate. If you’re using more than 30% of your credit limit, your score might take a hit. Many investors don’t realize that even if they’re making payments on time, maxing out credit cards can drag their scores down.

Introducing the 911 Usage Loan

Here’s where the magic happens! If your credit score isn’t high enough to qualify for a good DSCR loan, there’s a solution: the 911 Usage Loan. This is a short-term, private loan that helps you pay off your credit cards. Once those balances are paid off, your credit score could jump up—sometimes by 100 points or more!

How It Works:

  1. Simulation: First, you’ll run a credit simulation using tools like MyFICO or Credit Karma. This shows you how much your score could increase if you pay off your credit cards.
  2. Loan Approval: If the simulation shows that your score will improve enough to make a difference, we’ll move forward with the loan.
  3. Pay Off Credit Cards: The 911 Usage Loan pays off your credit cards, reducing your credit utilization rate.
  4. Watch Your Score Rise: As soon as your credit card balances update, your credit score should increase, sometimes dramatically.

Real-Life Example:

A recent client in Texas had a credit score of 653. After using a 911 Usage Loan to pay off his maxed-out credit cards, his score jumped to 753! This change not only helped him qualify for better loan terms but also saved him a significant amount of money each month.

The Business Credit Card Trick

Another smart move is to transfer your credit card balances to business credit cards. Unlike personal credit cards, most business cards don’t report your usage to personal credit bureaus. This means you can keep your personal credit score in good shape while still having access to the credit you need for your investments.

Note: Be cautious with Capital One business cards, as they still report to personal credit bureaus.

Why This Matters

Improving your credit score can have a big impact on your real estate investments. Not only can you qualify for better loans, but you can also increase your cash flow. And in some cases, having a higher credit score is the difference between getting approved or not.

Get a 911 Usage Loan Today!

If your credit score is holding you back from getting the best DSCR loan, consider a 911 Usage Loan. It’s a short-term solution that could set you up for long-term success in real estate investing.

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How Flexible Are the Rules and Guidelines?

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When you’re investing in real estate, finding the right loan is crucial. If you’re considering a DSCR (Debt Service Coverage Ratio) loan, you may wonder how flexible are the rules and guidelines. Are all DSCR lenders the same? The short answer is no.

Let’s dive into the details and see how DSCR loans work and what flexibility you can expect.

DSCR Loan Rules Vary by Lender

Unlike traditional loans, which are tightly regulated by Fannie Mae or Freddie Mac, DSCR loans are different. Each lender has its own set of rules. This means that what works with one lender might not work with another.

For example:

  • Some lenders will only approve loans for 1-4 unit properties.
  • Others may allow financing for condos, short-term rentals, or even commercial properties.
  • Some may offer lower down payments, while others might require more equity.

Example: Short-Term Rentals

Not every lender will finance a short-term rental property like an Airbnb. But some lenders specialize in these types of loans. If you’re looking to finance a short-term rental, you’ll need to find a lender that’s open to these kinds of properties.

Credit Score and DSCR Ratios Can Vary Too

Another big area of variation is credit scores and DSCR ratios.

Here’s what to expect:

  • Some lenders may approve borrowers with a credit score as low as 620.
  • Others may require a higher score, such as 680 or 700.
  • The DSCR ratio requirement can also change. Some lenders want at least a 1.1 DSCR, while others may be more flexible.

Example: Credit Score Flexibility

Imagine you have a credit score of 650. One lender might deny you, but another could approve your loan with a slightly higher interest rate. Shopping around for the right lender is key here.

Types of Properties That Can Be Financed

Another area where flexibility shines is the types of properties that qualify for DSCR loans. While many lenders stick to simple 1-4 unit properties, others venture into more unique investments.

Some lenders will approve loans for:

  • Mixed-use properties (part commercial, part rental)
  • Rural properties
  • Larger properties like 24-plexes
  • Portfolio loans (multiple properties under one loan)

Example: Mixed-Use Properties

Let’s say you have a building that’s both retail space and residential units. Some lenders won’t touch this. However, there are DSCR lenders who specialize in mixed-use properties.

Loan Amount Limits

Minimum and maximum loan amounts also vary from lender to lender. Some lenders have a minimum loan size of $150,000 or even $300,000. Others may be more flexible and accept loan amounts as low as $50,000.

Example: Small Loans

If you need financing for a smaller project, like a $75,000 loan in a rural area, many lenders won’t help. But there are DSCR lenders out there who specialize in smaller loans.

Pricing and Interest Rates Differ, Too

On top of all the flexibility with the rules, pricing also varies. One lender might offer you a lower interest rate for the same type of loan, while another could charge more based on their guidelines and risk assessment.

Example: Interest Rate Differences

Let’s say you’re shopping for a DSCR loan for a 4-unit property. You could find one lender offering a 6% interest rate, while another lender quotes you 7.5% for the same loan type.

Why Shopping Around Matters

As you can see, DSCR loan guidelines are far from universal. That’s why it’s important understand how flexible the rules and guidelines are for different lenders. Whether you have a smaller project, a rural property, or a unique portfolio, there’s a lender out there who will work with you.

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What is the best option: Interest Only vs Amortized

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When deciding between DSCR interest-only vs amortized loans, it’s important to know the difference and how each option impacts your cash flow and long-term goals. Both types of loans have pros and cons, so let’s break them down.

What is an Interest-Only Loan?

With an interest-only loan, you pay just the interest on the loan for a set period. This means your monthly payments are lower during the interest-only phase. However, after that phase ends, you’ll need to start paying down the principal, which increases your payment amount.

Example:

Imagine you take out a loan for $100,000 with an interest-only period of 5 years at 5% interest. During that time, you’ll pay $417 per month. Once the 5 years are over, you’ll start paying the principal, so your payment will jump higher.

Pros:
  • Lower monthly payments at the start.
  • More cash flow for other investments or expenses.
  • Flexibility if you plan to sell or refinance before the principal payments kick in.
Cons:
  • No reduction in the loan balance during the interest-only period.
  • Payments can jump significantly after the interest-only phase.
  • If the property doesn’t increase in value or if you don’t sell, you could be stuck with a higher payment.

What is an Amortized Loan?

With an amortized loan, you pay both the interest and a portion of the principal from the beginning. This means your monthly payment stays the same, and over time, more of your payment goes toward reducing the loan balance.

Example:

Let’s say you have the same $100,000 loan with a 5% interest rate, but it’s amortized over 30 years. Your payment would be about $537 per month. While that’s more than the interest-only loan, each month you are paying down the loan, and your balance decreases steadily.

Pros:
  • Steady payments that stay the same over time.
  • You build equity in the property right away.
  • Lower total interest costs over the life of the loan.
Cons:
  • Higher payments upfront compared to an interest-only loan.
  • Less cash flow for other investments or expenses.

Which Option is Best?

The best option depends on your strategy and goals. Here’s how to decide:

  • Short-Term Strategy (Interest-Only): If you’re planning to hold the property for a short time, or if you need maximum cash flow now, interest-only might be the way to go. You get lower payments upfront and can use that extra money for other investments. But be careful! When the interest-only period ends, your payments will go up.
  • Long-Term Strategy (Amortized): If you’re in it for the long haul, an amortized loan makes more sense. You’ll build equity over time and won’t face a big payment jump later. It’s a safer bet if you plan to hold onto the property and want to slowly pay off the loan.

Final Thoughts

Choosing between interest-only vs amortized loans depends on your situation. If cash flow is tight and you expect to sell or refinance soon, interest-only might work better. But if you want stability and long-term equity, an amortized loan is usually the safer choice.

Now that you understand the difference, you can pick the loan that fits your goals best!

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My Rental Property Isn’t Cash Flowing!

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Finding out that why your rental property isn’t cash flowing can be frustrating. This is a common concern, especially as interest rates rise. Let’s dive into why this happens and how you can better understand it.

Rising Interest Rates and Cash Flow

In recent years, interest rates have increased significantly. This rise has made it harder for rental properties to cash flow, especially if you’re using DSCR loans.

Example: Two Years Ago vs. Now

Two years ago, if you took out a $250,000 loan at an interest rate of 3.75%, your monthly payment would have been about $1,158. Today, if you take out that same loan at 9%, your payment jumps to around $2,011. That’s an $853 increase per month on the same property.

This rise in interest payments directly affects your cash flow. Even if your rent has gone up, it often isn’t enough to cover the increased costs. For example, rents might have gone from $1,500 to $1,700, but that increase is much smaller than the jump in your monthly payment.

How DSCR Loans Have Changed

DSCR loans used to require a simple one-to-one ratio, meaning your rental income just needed to cover your expenses to qualify. Now, many DSCR lenders require a higher ratio, like 1.1 or more. This means your property must generate more income than before to qualify for the loan.

On top of that, other costs like taxes and insurance have also increased, putting even more pressure on your cash flow.

What Happens When Interest Rates Drop?

Here’s where the silver lining comes in. If interest rates drop, your cash flow improves.

Example: Interest Rate Drops to 7%

Let’s say the interest rate drops to 7%. In that case, your payment on the same $250,000 loan would decrease to about $1,663. That’s a $348 savings each month compared to the 9% rate.

Example: Interest Rate Drops to 5%

If interest rates drop even further to 5%, your payment could go down to $1,342. That’s a massive $669 improvement in cash flow compared to the 9% rate.

Why You Should Still Consider Buying

Even though cash flow might be tight now, buying properties with good equity can still be a smart move. If you find a property with 25-30% equity and it’s at least breaking even, you could see great returns in the future when rates go down.

Example: Break Even Now, Profit Later

If you buy a property now that breaks even or comes close, as rates go down, you could refinance and suddenly have a property that’s cash flowing by hundreds more each month. Plus, when homes become more affordable, more buyers will enter the market, driving up property values.

Conclusion

While it’s harder to cash flow with rising interest rates, there’s still potential for long-term gains. By understanding how higher rates impact your payments and planning for future rate drops, you can position yourself for success. Focus on finding good deals with equity, and as rates decrease, your cash flow will improve, and property values will rise. The key is patience and strategy. Do you need to find out why your rental property isn’t cash flowing? Contact us today! 

 

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Is a DSCR Loan Right for You?

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If you’re a real estate investor looking for an easier way to qualify for financing, a DSCR loan might be the solution. Unlike traditional loans, DSCR loans focus on the income from your rental property instead of your personal or business finances. Whether you’re new to investing or you like to keep your taxes lean with write-offs, this loan could be your ticket to growing your portfolio. Is a DSCR loan right for you? Let’s take a closer look!

What is a DSCR Loan?

A DSCR loan stands for Debt Service Coverage Ratio. It’s a mouthful, but simply put, it’s a loan for real estate investors. This type of loan focuses on rental properties and doesn’t require proof of your personal or business income. That means even if you started your business yesterday, you might still qualify!

Unlike traditional loans, the DSCR loan is based on whether your rental property will break even or better.

Who is a DSCR Loan For?

DSCR loans are designed for real estate investors looking to buy or refinance rental properties. If you:

  • Are just starting out in real estate investing
  • Don’t show much income on your tax returns (because you write off expenses)
  • Have a good credit score and want to focus on rental properties

Then, a DSCR loan could be a perfect fit for you.

This loan is ideal for people who don’t want to show income or haven’t been in business for two years. Many investors who just quit their jobs and started investing in real estate can benefit from this product because they can qualify without needing two years of income.

Key Benefits of DSCR Loans

  1. No Personal or Business Income NeededWith traditional loans, lenders often want to see two years of income history. But DSCR loans only care about the property’s ability to cover its debt.
  2. Rental Income is What Matters
    DSCR loans don’t rely on your tax returns. Instead, they check if the rental income will cover the property’s mortgage and expenses.
  3. Flexible Options
    You can use DSCR loans for single-family homes and even properties with up to four units. There are also portfolio options for multiple properties and mixed-use loans for special cases.

The DSCR Loan Formula

How does a DSCR loan work? It’s all about the numbers. The lender looks at the rent your property brings in or could bring in. This is called the Debt Service Coverage Ratio. If the rental income covers your mortgage, taxes, and insurance, you’re good to go!

Example:
If your property rents for $1,000 a month and your mortgage and property expenses total $900, you have a good DSCR ratio, and you’re in a solid position to qualify.

Three Things Lenders Look For

To qualify for a DSCR loan, lenders will check:

  1. Rental Income
    The property should break even or have positive cash flow. The lender will only consider five things: your mortgage payment, property taxes, insurance, HOA (if applicable), and flood insurance (if required).
  2. Credit Score
    Higher credit scores mean better rates. The higher your score, the better the deal you’ll get.
  3. Loan to Value (LTV)
    How much money are you borrowing compared to the value of the property? A lower loan-to-value ratio means less risk for the lender and better terms for you.

When is a DSCR Loan Not Right?

While DSCR loans are great for many investors, they aren’t for everyone. Here are a few cases where a DSCR loan may not be the best choice:

  • Owner-Occupied Properties: You can’t live in the property if you use a DSCR loan. It’s strictly for rental properties.
  • Fix and Flips: DSCR loans aren’t ideal for short-term investments like flips because they often come with prepayment penalties.
  • Other Options Available: If you have solid income and qualify for a traditional loan, you might want to explore that route for better rates and no prepayment penalties.

Conclusion: Is a DSCR Loan Right for You?

If you’re looking for a long-term rental property investment and don’t want to deal with showing income or tax returns, a DSCR loan is a great option. It allows you to invest in rental properties with fewer hurdles, focusing on the property’s performance instead of your personal finances.

To see if it’s the right fit, run the numbers, look at your credit score, and make sure the property will at least break even. And, as always, it’s wise to shop around and get the best rate possible!

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Compare different loan options today!

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When you’re investing in rental properties, choosing the right loan can make all the difference in your cash flow and overall investment success. Let’s compare three different loan options. Theses include DSCR loans, traditional loans, and local bank loans. Therefore, understanding both the pros as well as the cons is vital to finding the best loan for your investment success! 

Traditional Loans: Pros and Cons

Pros:

  1. 30-Year Mortgage Stability: Traditional loans offer the security of a 30-year mortgage. Therefore, they have predictable payments over a long period, which can help with long-term financial planning.
  2. No Prepayment Penalty: Unlike some other loans, traditional loans usually don’t have prepayment penalties. You can sell or refinance your property without worrying about extra fees.
  3. Lower Interest Rates: Generally, traditional loans come with lower interest rates compared to DSCR loans. As a result, this can significantly impact your cash flow, especially on larger loans.
  4. Home Hacking Opportunities: If you’re buying a duplex, triplex, or fourplex, you can live in one of the units and qualify for an owner-occupied loan. This often means a lower down payment and a better interest rate.
  5. Uniform Rules Across States: Traditional loans follow the same rules and guidelines across all 50 states. This makes them a consistent option no matter where your property is located.

Cons:

  1. Income and Credit Requirements: In order to qualify, you need to prove your income and have good credit. This can be a hurdle for some investors.
  2. Cannot Close in an LLC: Traditional loans require you to close in your personal name, not in an LLC. This can affect how you hold and protect your properties.
  3. Limited to 10 Properties: You’re limited to financing 10 properties with traditional loans, which can be restrictive if you’re planning to build a large portfolio.
  4. Seasoning Requirement for Cash-Out Refinances: If you want to cash out, you must wait one year after your last refinance or purchase.

DSCR Loans: Pros and Cons

Pros:

  1. Flexibility: DSCR loans are incredibly flexible. Therefore, they can be used for single-family homes, fourplexes, and even larger properties. They’re also great for unique properties like VRBOs, non-warrantable condos, as well as mixed-use properties.
  2. Ease of Qualification: You don’t need to prove your personal income or employment status. The loan is based on the cash flow of the rental property itself.
  3. Close in an LLC: DSCR loans allow you to buy and refinance properties under an LLC, offering better protection for your investments.
  4. No Limit on the Number of Properties: Unlike traditional loans, many DSCR lenders don’t limit the number of properties you can finance.
  5. Available in All States: While guidelines may vary slightly, DSCR loans are available across all 50 states.

Cons:

  1. Prepayment Penalties: DSCR loans often come with prepayment penalties, which can be costly if you plan to sell or refinance within the first few years.
  2. Higher Interest Rates: Interest rates on DSCR loans are typically higher than traditional loans, which can impact your cash flow, especially on larger loan amounts.
  3. Market Sensitivity: DSCR loans can be more sensitive to market changes. During uncertain times, these loans might disappear or change rapidly, which can be risky for investors.

Local Bank Loans: Pros and Cons

Pros:

  1. In-House Products: Local banks often offer in-house loans, which they fund, service, and keep. These loans usually come with shorter terms, like three, five, or seven years. There are also options to refinance or adjust afterward.
  2. Flexibility: Local banks are known for their flexibility. They may finance unique properties or smaller loans that larger lenders won’t touch. Therefore, this makes them a great option for small towns and rural properties.
  3. No Prepayment Penalties: Like traditional loans, many local bank loans don’t have prepayment penalties, giving you the freedom to refinance or sell without extra costs.
  4. Favorable Terms for Small Loans: Local banks often prefer smaller loans, which can be a perfect fit for lower-priced properties in smaller markets.

Cons:

  1. Varied Rules: Each local bank sets its own rules, which means you have to shop around to find the right fit. This can be time-consuming.
  2. Lending Limits: Local banks may have lending limits, which can be a barrier if you’re trying to finance multiple properties or larger portfolios.
  3. Geographic Limitations: Local banks tend to lend within specific regions or markets. If your property is outside their footprint, you might not qualify.
  4. Callable Loans: Some local bank loans are callable, meaning the bank can demand full repayment before the end of the term if market conditions change.

Conclusion: Choose the Right Loan for Your Situation

Each of these loan types—DSCR, traditional, and local bank loans—has its own strengths and weaknesses. The best choice depends on your current situation, investment goals, and the specific property you’re financing. When you compare different loan options you can maximize your cash flow and protect your investments.

Remember, it’s all about finding the right fit for each property and stage in your investment career. Whether you’re just starting out or adding to your portfolio, there’s a loan that can help you achieve your goals. Compare different loan options today to set yourself up for a successful future! 

 

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