In this post, we’re looking at DSCR loans, which we think is one of the best alternatives to hard money loans.
A hard money loan is a loan secured by a property. There are plenty of good things about them. They close quickly — we’re talking five to seven days, maybe even three in some scenarios. Very little underwriting is needed. The downsides are that they have high interest rates, typically 12% or more and they require a lot of equity in the home. Sometimes,you can find a hard money lender with a 20% down minimum, but most times it’s around 40% or 50%. These loans are not good for longer term investors, but they’re great for people who move quickly.
Hard Money Pros
Quick closings (possible in less than 7 days)
Very little underwriting
Hard Money Cons
High interest rates (typically 12% or more)
Lots of home equity required
Bad for long term investors
Thankfully, we’ve got an alternative.
DSCR stands for Debt Service Coverage Ratio. A DSCR loan allows you to take a loan out on an investment property based on the appraised cash flow that it might generate, as opposed to your income.
Your debt service coverage ratio is calculated by taking your gross rent income and dividing it by the principal, interest, taxes, and insurance (PITI) payment. As an equation that looks like this:
So, let’s say your rent was $2500 and your total PITI payment is $3000. Your DSCR, in this example, would be calculated as follows:
This gives you a DSCR ratio of 0.83, and as long as your DSCR ratio is greater than 0.75, here in Maricopa County, you’re eligible for this program.
With this program, we’re basically allowing you to get 100% credit for your rent. DSCR loans have lower rates and fees than hard money, and down payments can be as low as 20%. It can be used on purchases and cash-out refinances. But the really great thing is that there’s no lease needed. We use the market rent from the appraisal where we order a credit market analysis where an appraiser looks around at comp sales and rentals, so there’s no personal income needed, there’s no need for your tax returns or pay stubs, and we don’t need proof of your employment. Gifts are allowed for down payments, and you can get a loan of up to $3.5 million. Plus, the minimum credit score is only 620.
The DSCR Pros at a Glance:
Lower Rates and Lower Fees than Hard Money
Down payment as low at 20% down
Purchase and Cash-out Refinances allowed
Bank will give you 100% credit for your Rent
No lease is needed. We can use Market Rent from appraisal
No Personal Income documentation is needed
No Tax returns needed
No paystubs needed
No employment needed
Gifts are allowed for Down Payment subject to terms
Loan amounts up to $3.5 million
Minimum credit score is 620
This is sort of the opposite of hard money in the sense that you can’t pay this loan off for six months and it is only for investment properties. It’s not for second homes. And the home will need to remain in a livable condition. It can’t be gutted, but it’s perfect if you’re planning on renting it out, for example.
The DSCR Cons at a Glance:
Cannot be paid off before 6 months
Investment Properties only
Home will need to be in livable condition
The DSCR loan is perfect for:
Investors who don't want to provide employment info (tax returns, pay stubs, W2s, etc.
Investors who are looking to buy and flip (as long as payoff does not occur before 6 months from loan closing)
Investors who are looking to buy and hold properties
The DSCR loan is perfect for investors who do not want to provide employment information, tax returns, paystubs, W2s, etc; for investors who are looking to buy and flip properties, as long as payoff does not occur before six months from lona closing; and, investors who are looking to buy and hold properties. It's a classic for self-employed borrowers who have very complex incomes who are looking to get an investment property, since it solves the problem of having to deal with complex income reporting. It can also be great if you have a bunch of investment properties and say you’ve maxed out on the conventional loan limit of ten, the DSCR loan is a perfect option.
If you’d like to get a DSCR loan, or if you have any questions about anything mortgage related, don’t hesitate to reach out.
You can give us a call at 602-535-2171 or shoot us an email at team@AZmortgagebrothers.com. Be sure to ask us for a free quote on your next mortgage. We'll be sure to give you personalized service and help you through the whole process.
Signature Home Loans LLC does not provide tax legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax legal and accounting advisors before engaging in any transaction signature Home Loans NMLS 1007154 And what's number 210917 and 1618695 equal housing lender.BACK TO LIST