Why you might want to consider a DSCR loan to buy a rental property

What is a DSCR loan and how can this type of financing help you purchase a rental property portfolio? In Q3 2022, the DSCR loan emerged as a viable option for investors looking to buy a rental property who need a bit more flexibility than traditional loans backed by Fannie Mae and Freddie Mac. DSCR loans absolutely can help you buy a rental property with fewer loopholes and red tape and here is how…

First things first what is a DSCR Loan? ADSCR loan otherwise called a debt service coverage ratio loan is a form of mortgage where the loan payment debt is serviced by the property itself. Put simply, the revenue generated from the property offsets the mortgage payment. In the most simplistic of forms, it means the property sustains itself. Some mortgage companies offer this type of financing some don’t. Here are some things to consider as it relates to DSCR loans and what you need to know. DSR loans are available on single-family homes, condominiums, planned unit developments, and multifamily property and oftentimes require a down payment of as much as 30% sometimes more depending on a host of factors including your credit score and the type of property in which you’re desiring to purchase.

DSCR loan pay stubs, W2s, and income from tax returns,  as long as the property sustains itself. DSCR Loans usually want a good or higher credit score. This type of financing usually means FICO scores around 680 or higher as a general rule of thumb. In terms of pricing and what to expect for DSCR  residential mortgage loans anywhere from the high sixes to the mid eights on such a product is not out of the ordinary on the 30-year fixed rate mortgage. Some will take it a step further wherein the property has to just sustain itself dollar for dollar. So for example for a ratio of 1:1 if the rents of the property are $3k a month and the mortgage payment is $3k a month that’s a ratio of 1 t:1 some have higher ratio requirements wherein their terms are a little bit more flexible.

Prepayment penalties on this type of financing are also not out of the question either. A prepayment penalty prevents you from paying off the mortgage in full or making a principal prepayment on the loan in the first 1-3 years sometimes longer based on the terms of the individual lender you’re working with. These are things to know as relates to DSCR mortgage loans. These loans could be absolutely beneficial if you’re looking to purchase an income-producing property when your financial situation is outside the box of traditional financing. Other things to be aware of are that lender by lender some will allow a first-time rental to qualify others to want at least a 1-to-2-year housing history specifically being a property owner. This is why it is critical if you’re going to go in this direction to buy a rental property, work with an experienced lender who knows the intricacies of this financing type as it relates to rental properties and how that experience might be applied to your practical application.

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