DSCR Loans – An Investment Real Estate Funding Option When Your Income is a Problem.

By Douglas Katz – 12/6/2022

More and more people are getting into the real estate investment space.  While there is no one single issue that has created this growth, a host of likely factor such as the desire for passive income and a stable retirement, the desire for real, tangible assets and general distrust if the equities markets are likely contributors.  Regardless of the reason, a real estate strategy does represent a good diversified approach, but financing is not always easy.  They key is knowing your financing options and Debt Service Coverage Ratio or DSCR Loans should be in your toolkit.

Most new investors appropriately first explore using traditional conventional programs to build their portfolio.  This is a decent option as it will usually provide the best pricing, but that comes at a cost.  Conventional financing brings with it all of the traditional regulatory and underwriting requirements.  Expect full income verification and documentation which aside from being time and resource intensive is harder to qualify for, especially if you carry a high debt load.  The allowable debt-to-income ratio is very specific and exceeding it will result in a denial, even if the subject property that you want to finance is squarely in the black and generating income.

The good news is that there are now readily available options better suited for the acquisition and financing of rental properties.  These programs, the aforementioned DSCR Loans, focus on the collateral as opposed to the borrower.  As long as the debt service for the property to be financed equals or exceeds a specific hurdle commonly 105% or 100%.  Sometimes, however, there are programs that allow for a DSCR of under 100%, but generally expect the lender to want to see a profitable property.

I know what question this likely creates and, yes, this means that you can acquire a rental property without having a source of personal income. If you have a job, but the income stream is unpredictable, that is allowable as well.  I see this often with self-employed borrowers who are building investment real estate portfolios, but are also managing their own businesses to minimize their tax burden.  To the lender, all that matters is that the property itself is profitable.

There programs are not without non debt ratio related requirements such as minimal credit scores and assets equal to a minimum threshold for reserves for the subject property as well as any other properties that you have in your portfolio.  The good news is that these programs tend to be flexible with respect to these requirements and with the help of a good loan officer a loan option can be structured around credit and the source of assets if there are partners and other resources available.

Why would an investor not use programs like this all of the time?  Usually the answer to this question comes down to price.  While the current spread between conventional funding and DSCR loans is fairly tight, there is usually a discernable difference between the two loan types.  In the past, it was not uncommon to see 1% or more difference in rates for conventional vs the other alternatives.  This premium is just too much for some investors but, under many scenarios, it is the only option making the price question mute.  I anecdotally find that the more sophisticated an investor gets the more they understand and actively use programs like DSCR loans regardless of price.

If you are looking at acquiring or refinancing an investment property, I always recommend looking at all of the options.  A complete and in-depth analysis of all of your choices is especially critical in the investment space as there a a ton of unique programs.  They all have their own particular benefits and drawbacks which make them the appropriate choice for a specific scenario, so I always recommend using a lender who can provide the right consul to you.  Too often, a choice is overlooked because of lack of knowledge or familiarity with a program.  Hopefully this article has provided you the incentive to add DSCR loans to any plan to build or grow your rental portfolio.

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