Transcription
The pros and cons of DSCR [Music] loans.
Hey, what's going on everybody? It's Jeff Chavar, and Jeff the mortgage pro. Hope you're doing really well today. Uh, thanks so much for watching. Today, we're going to talk about the pros and cons of DSCR loans. Now, these are really, really great products for investors. Before I get into it, do me a huge favor. Go ahead and click on that like button if you like these videos. And if you really like these videos, go ahead and subscribe down below. I'd really appreciate it. Trying to help grow my channel and get the message out to as many people as I possibly can.
Okay, so let's jump into the pros and cons of DSCR loans. First of all, what is a DSCR loan? It's a loan for investors for residential real estate. And the cool thing about it is that it allows you to qualify with the income of the property, not with your own personal income. Okay, so that's kind of the basics of it. I've got a lot of other videos that you can take a look at, but let's go into the pros first of DSCR loans.
So the first one is that personal income, it does not matter. That means that you don't have to have a job to be able to get this particular type of a loan, which I think is a huge benefit for a lot of people across the country. And, uh, that's definitely a number one pro of the DSCR loan.
The second one, there's no income check. So since you don't have to have a job, we don't need anything like W2s, pay stubs, tax returns. None of that stuff matters when you're doing DSCR loans. So another huge benefit there.
There's no limit to the number of properties that you are allowed to have with a DSCR loan. You could do, you know, 10 or 20 or 50, 50, or 100 if you wanted to. Now, investors or lenders sometimes they have limits to the amount of DSCR loans you can have with their company, but in general, there is no limit to the amount of DSCR loans that you can have.
Um, there is no financed property limit. So when you do conventional loans for investment properties, you can have up to 10, and then you're stuck. There's no other way to do more conventional loans. So DSCR does not limit you to the number of financed properties you have. Like I said, you can do as many as you want.
Um, you can fund different property types with these DSCR loans. So you could do single-family homes, you could do condos, town homes, PUDs, you could do two to four units, and then even in some instances, you could do five to 10 units using this residential DSCR loan product. So another pro on what types of property you can use to buy a property like this.
You can get long-term financing with DSCR loans. So anywhere from a 30-year fixed to a 40-year fixed. And then in some instances, you can actually even do interest-only on that long-term financing. So that could help minimize your monthly payment to to produce more cash flow for you coming in from the rental income of that property.
Um, you can use these for either short-term rentals or long-term rentals. And a lot of times when you're doing conventional loans, you don't have that option. You usually can only do, uh, short-term or excuse me, long-term rentals when you're doing conventional loans. But with DSCR, it doesn't matter. You can do either one.
Um, oftentimes there's no reserves that are required when you're doing cash-out refinances with DSCR loans because typically you can use the cash out for reserves. Now, when you're doing a conventional loan for an investment property, and then when you're doing a conventional purchase loan for an investment property, you're probably going to need reserves, and that's going to probably be anywhere from six to 12 months. But with DSCR loans, they're minimized. And if you have good credit, depending on the credit profile, as little as three months worth of reserves. Now, remember, reserves is the principal, interest, taxes, and insurance monthly payment, and then that's one month of reserves. Then you probably need a minimum of three. So when you're doing cash-out refinances with DSCRs, though, you do not need to have reserves because you can use the cash out as reserves typically.
Um, another huge pro that I think is great, and I use this all the time with my clients, is that they're these are for business purpose type loans as well. So that means that you can close in an entity if you wanted to. So a lot of people will close in an LLC just to be able to hold title in a good way. And then sometimes, um, these, you know, people close in their own personal name as well. So either way, you can close, um, how you want to. Whereas if you do conventional loans, you're limited by the amount of, uh, or the way that you can close. You can only close in your personal name typically when you're doing a conventional loan. But DSCRs, you can close in an entity, you can close in your own personal name.
And then lastly, another pro that I thought of, there's a lot less documentation required. And the reason why I say that is that when you do a conventional loan, you're going to be using your own personal income to qualify for that investment property. So you have to have, if you have a job, you know, pay stubs, uh, you know, tax returns, things of that nature that could get lengthy, W2s, things of those nature. But when we're doing the DSCR, we don't have any income documentation. So there's going to be a little bit less stuff that you have to provide in order for us to be able to close a loan in the DSCR.
Okay, so those are all the pros that I can think of. Uh, if you can think of any more, please drop them in the comments down below. Um, obviously, this isn't the all-encompassing list, but I would love to, um, be able to at least get some more ideas if you have some more pros of of DSCR loans.
Let's go through some of the cons now. This is a big one. Uh, DSCR loans come with prepayment penalties. Um, most states will allow you to have a prepayment penalty, but some of them don't. There's a few of them that, you know, don't have that. But what in turn happens is that the prepayment penalty is built into the rate. So you're going to have higher rates. Those states that don't allow prepayment penalties, prepayment penalties can be anywhere from one to five years or as little as no prepay. Actually, the higher or the longer the length of the time for the prepay, usually the lower end of the rate spectrum it is. And then vice versa, if you were to go with a lower or no prepay, then you're going to be on the higher end of the rate spectrum. But each individual scenario is different. So check with me before you, uh, decide on which prepay that you're going to use.
Um, rates are usually going to be higher than conventional. And, you know, in reality, they're not that much higher, anywhere from maybe a half a percent to maybe up to one to one and a half percent higher, depending on the credit profile of the borrower that's getting the DSCR loan. So they are going to be a little bit higher. You know, that is a con of these ones. But at the same time, if you can make the property cash flow and, uh, still get the DSCR finance on it, that's still going to be a pretty good option for you.
Um, loan origination fees are sometimes a little bit higher. Conventional, uh, a lot of times you don't have a loan origination fee. Usually with DSCR loans, they come with a loan origination fee, just because that's the way that you can get paid on those types of loans. And so this is a, you know, the flexibility of the way that this allows you to qualify often times comes with a little bit higher cost, and that's because they have loan origination fees.
Um, another pro, a con that I would say is that usually 20% down is the minimum that's required. Now, there's exceptions to this. There's a couple loans out there that'll allow you to do 15% down. But if you go with 15% down, just know that the rates are going to be really a lot higher, and it's going to be harder to make that property cash flow with a 15% down payment. Because again, like most mortgages, if they're less than 20% down, they would have mortgage insurance on them. DSCR loans don't have mortgage insurance. So in turn, what happens is lenders build that into the rate, and that's why those rates are going to be higher at 15% down. But 20% down is going to be required. So I I put this as a con just because you have to come up with that amount of money to be able to purchase a property using the DSCR loan. You can always do more, but a minimum of 20% down.
Cash flow is important, um, in this one. So if the rental income is a lot less than the PITI, then the debt service coverage ratio alone does not always work. So, um, I've had this happen in a couple instances where we're looking at a property and we project the, you know, the rental income to be quite high, and then it comes in significantly lower when the rental survey comes back, and that basically disqualifies the loan. You can't do it in some instances. Now, there are no ratio options, there's less than one ratio options, and again, the pricing is going to be a little bit higher. So you can sometimes solve that problem. But if it's significantly less, and, uh, you can't go no ratio, then it may just not work. But for the most part, um, you know, cash flow is definitely important. I think this is great though, because it also helps you be a good investor. It makes you make the right decisions when you're buying property or refinancing property to make sure that you're cash flowing still against the principal, interest, taxes, and insurance of the mortgage payment. Okay.
Um, there's usually a minimum credit score with DSCR loans. We can go down as little as 640 for the, uh, FICO score. Typically, you're not going to see very good rates, and your loan to values are going to be a lot lower when you're doing, uh, you know, lower credit type loans like that. So if you have 700 or better, then you're probably in a pretty good position. Um, maybe even 680 or better, you're probably in a pretty good position to get a DSCR loan. And they go down to 640, but I put this as a con just because, you know, it's not the greatest for, uh, lower credit options.
And then lastly, um, what I thought about is the minimum DSCR is usually going to need to be 1.0 or above. Um, if it's below that, there like I said, there are options, but at the same time, they're not very attractive once you get the DSCR down below one. So I put that as a con on here for these DSCR loans.
In general, I think that the DSCR is one of my favorite, uh, loans to do. I think it's a great loan for investors. And if it's something that you think that you would qualify with, go ahead and hit my calendar link down below. And that calendar link will allow you to schedule an appointment with me because I'd love to talk to you about helping you get a DSCR loan for a purchase or even for a refinance, whether it's a rate and term refinance or if it's a cash-out refinance with a DSCR loan. I'm the expert that can help you. Thanks so much for watching, and I look forward to chatting with you on the next show. Have a great day.