What is a DSCR loan for investment mortgages?
A DSCR loan is perfect for the real estate investor who wants to grow his or her portfolio of investment properties. It is based on the rental income of the property and not the personal income/assets of the borrower. Short for Debt Service Coverage Ratio, a DSCR loan is perfect for investors who want to scale up their real estate investing business. Usually held in a business entity such as an LLC, the DSCR loan will not count against the personal debt (DTI) ratios of the borrower. Also, even though there is a personal guarantee normally given on the DSCR loan, it will not report to personal credit so long as the loan is paid and maintained in good standing. Therefore, these DSCR loans allow multiple properties to be added to the investor’s holdings over time.
What makes up a good DSCR loan program? Everything you need to know about debt service coverage ratio loans.
There are many lender options for real estate loans for investment purposes these days, and the investor will likely be overwhelmed by so many financing choices. Once the investor has decided to forego the “old way” of doing things with a traditional mortgage loan, the many DSCR loan program options may still overwhelm. If you have gained enough knowledge by now about DSCR loans work and are now considering finding a DSCR lender out there, here is what we think makes a good DSCR loan program.
DSCR lender characteristics:
- easy to find online and to contact by phone or email
- helpful communication and quick responsiveness (it’s a sign that your DSCR mortgage loan will get closed on time)
- patience to answer questions about DSCR loan requirements, how they work, and the pros and cons of DSCR loans
- ability to tell the investor why a deal or borrower may not have eligibility for a DSCR loan (e.g. does not meet minimum DSCR ratio)
- full, transparent DSCR loan pricing terms sheets provided to the borrower as a quote (and quickly upon request)
- desire to provide an effective DSCR loan solution to the investor for long-term success (and repeat business) instead of maximizing fees on the deal
- no late/surprise/hidden fees charged
- gets the loan closed on time (25-30 days) and with minimal hassle
- document requests are provided timely, and document receipts are processed timely
- easy loan application process with no excess documentation requirements beyond the basics (e.g. a personal financial statement is required by some DSCR lenders, and this is unnecessary)
- lower minimum loan amounts qualify for a DSCR loan, e.g. $100,000 (some lenders don’t consider DSCR loan amounts below $200,000)
DSCR loan characteristics:
- competitive interest rates in line with the current market conditions
- reasonable origination and processing fees, all of which are communicated on a term sheet early in the process and don’t change later
- reasonable pre-payment penalties, which are thoroughly explained
As you can see, most of the items related to a good DSCR loan relate more to the lender than the loan itself. The terms for a DSCR loan are generally very similar across dozens of lenders out there, while the best experience for the borrower is usually determined by how the lender operations. DSCR loans offer a lot of convenience and flexibility for the real estate investor seeking a mortgage, but make sure to choose a lender that can deliver the best experience when getting a DSCR loan. If you choose the wrong lender, your great DSCR loan terms may not be worth the stress and difficulties endured to get it.