DSCR loans can offer both advantages and disadvantages compared to traditional bank loans and conventional mortgages for rental property investors.
As you will learn, the pros of DSCR loans far outweigh the cons, which is why DSCR loans are now the go-to form of financing for rental property investors.
00:00 Introduction
00:24 Pro - Streamlined Underwriting
01:09 Pro - Loan Structure
02:02 Pro - Reliability
02:43 Con - Strict Guidelines
03:37 Con - Shenanigans
04:14 Con - Higher interest rates
04:51 Summary
Number 1: Streamlined Underwriting
DSCR loans have a shorter and less demanding processing checklist than bank loans and conventional loans. Underwriting items for DSCR loans include appraisal, credit report, liquidity verification, borrowing entity documents, landlord insurance verification, and where
applicable lease, verification of rent and security deposit receipt, and property management agreement.
DSCR lenders should never ask you for tax returns, W-2 income, pay stubs, or company financial statements.
A good DSCR lender can fund your DSCR loan in under 30 days. At OfferMarket, our target funding timeline is 15 to 25 calendar days.
Number 2: Loan Structure
DSCR loans are generally structured as thirty year term, fixed rate and fully amortizing, with LTV up to 80%.
To increase cash flow and boost DSCR to qualify for a higher LTV, you can even structure with a five or ten year interest-only period where principal payments are made over the remaining portion of the 30 year term.
DSCR lenders can fund your loan with DSCR as low as 1.0, though 1.1 is where you will find the best terms.
OfferMarket specializes in no and low seasoning cash out refi for rental property investors who use the BRRR strategy.
Compare this to traditional banks which generally offer lower LTV, shorter term, higher DSCR requirement, and 6 months of seasoning.
Number 3: Reliability
DSCR loans are a growing component of the multi trillion dollar institutional credit market.
While DSCR loan origination volume is growing fast, it struggles to satisfy the demand from institutional investors such as insurance companies, pension funds and credit funds that buy DSCR loans.
For this reason, as long as DSCR loan program guidelines for subject property and borrower are met, there is a very high probability that your loan will be funded
without delay.
Compare this to banks which may subject you to months of underwriting before ultimately rejecting your loan application for reasons unrelated to your application.
Cons of DSCR Loans
1. Strict Guidelines
The largest and healthiest part of the DSCR loan industry is 1 to 4 unit residential investment properties in non rural markets where the As Is value and the purchase price is one hundred thousand dollars or higher, and the guarantor's credit score is 680 or higher.
If an element of your transaction does not fall within program guidelines, your loan will either be declined or require an exception which can cause delay.
DSCR loan program guidelines are constantly evolving to adapt to the demands of borrowers and institutional investors, and to respond to market and risk.
A good DSCR lender will knowledgeably and transparently communicate program guidelines, proactively communicate to identify potential issues, and set expectations in a clear and thoughtful manner.
2. Shenanigans
There, we said it. The DSCR loan industry is fast growing and loosely regulated, attracting loan brokers, private lenders and salesmen who are not knowledgable about program guidelines, not expert in structuring your loan to meet your specific goals, not capable of closing your
loan in a timely manner, and not truthful or transparent about loan terms.
At OfferMarket, you can expect the most competitive term sheet, expert loan structuring, streamlined processing and complete transparency from your instant quote to your settlement statement at the closing table.
3. Higher interest rates
Given the demand for DSCR loans from institutional credit investors, the credit spread or risk premium has decreased, making DSCR loan interest rates from the most competitive DSCR lenders nearly the same as bank loans and conventional investment property loans.
In fact, OfferMarket's DSCR loan interest rates index at the time of this video was 0.8% lower than the prime rate offered by banks to prime borrowers.
Therefore, we include an asterisk on this con because it is not always true and may not be true in the future.
For the vast majority of rental property investors who want a streamlined borrowing experience with a high degree of certainty that their loan will be funded on an accelerated timeline, DSCR loans are strongly preferred as long as property and borrower guidelines are met.
To grow and optimize your rental property portfolio, get your ⚡ instant quote and pre-approval ⚡!
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