Real estate investing can be a lucrative business venture. That’s especially true for those who buy property to leverage it as a revenue stream.
Real estate investing is a sound business strategy, whether purchasing a home to renovate then selling it at a profit or converting a property into a rental unit.
Even small investors have made a nice profit by renting out properties. An effective long-term strategy includes buying a property and renting it out while the property appreciates in value, allowing the owner to increase the rent – and profits – over the years.
Sounds like a good plan, right?
Here’s the thing: Not everyone fits the profile of a real estate tycoon – significant income, savvy investor knowledge, strong history as an investor, savings for a large down payment.
Some of your clients may believe investing in real estate isn’t realistic for them. Others may have tried to get approved for a conventional mortgage loan to fund the purchase of an investment property but have been declined.
But other options may work for your potential investors. One option that has become especially popular recently is Debt Service Coverage Ratio (DSCR) loans.
How Do DSCR Loans Work?
DSCR loans are a particular type of mortgage financing that provide residential investment lending based primarily on the property’s cash flow potential. That’s quite different from a conventional mortgage loan, where income is the most critical factor for eligibility.
When considering your client for a DSCR loan, lenders are looking at three key things:
DSCR ratio: This refers to how well the property cash flows. In other words, the amount of income the rental property can yield to the borrower each month. The rental income must be at least enough to cover the monthly loan payment (1:1 DSCR ratio).
Credit score: Like with most loans, applicants should have a decent credit score to qualify. Generally, an average score of at least 700 will be enough. However, some lenders would accept as low as 640.
Down payment: Qualifying for any loan is always easier if the borrower can put money down at closing. The typical down payment for DSCR loans is between 20 and 30 percent.
Ideal DSCR Loan Candidates
These types of mortgage loans are ideal for a variety of would-be real estate investors, including those who couldn’t quite qualify for a conventional loan. In addition to that, DSCR loans work well for:
Self-employed borrowers: Some borrowers dislike having to supply all the financial details – personal and business – required when applying for a conventional mortgage loan. Because current income isn’t an eligibility factor for DSCR, these applicants don’t have to turn over as much financial information.
First-time real estate investors: While some of your clients understand the benefits of investing in real estate, they may think they aren’t qualified to do it. Whether it’s a lack of experience, income, or cash reserves, DSCR loans can help them overcome obstacles and qualify.
Borrowers wanting to close faster: Because these loans require much less information than conventional ones, the closing process can be much quicker. DSCR loans typically close within 30 days and sometimes even sooner.
More DSCR Loans Information
Qualifying for a DSCR loan is easier, faster, and less complicated than a conventional loan. But there are other benefits and things to note that may make them an attractive option for your clients.
- Fannie Mae limits borrowers to a maximum conventional financed property limit of 10. With DSCR loans, there is no limit. This allows investors to continue building their investment portfolios as large as they can afford to.
- The property doesn’t have to be rented at the time of loan closing. That means the borrower can purchase a vacant home but get it rented later.
- Typically, DSCR loans are borrowed to fund 1-4 unit properties in urban or suburban areas.
- DSCR loans are primarily used for properties that will be rented long-term
It’s time to contact any of your clients who have ever expressed interest in investing in real estate to update them on their loan options. A DSCR loan could help them realize their dream of becoming a successful real estate investor and put them in a better financial situation than they ever thought possible. And they’ll have you to thank for it.
To learn more about how we can help or schedule a Lunch and Learn, contact our office at 330-574-7500 or email email@example.com.
How difficult is it to get an investment property loan? US Lending Co. (n.d.). Retrieved August 2, 2022, from https://www.uslendingcompany.com/blog/how-difficult-is-it-to-get-an-investment-property-loan/
Dana Gentry, N. C. J. 28. (2022, June 30). Easy money loans appeal to would-be investors who lack income. Nevada Current. Retrieved August 2, 2022, from https://www.nevadacurrent.com/2022/06/28/easy-money-loans-appeal-to-would-be-investors-who-lack-income/
Bloomberg. (n.d.). Bloomberg.com. Retrieved August 2, 2022, from https://www.bloomberg.com/news/features/2022-06-14/airbnb-rentals-turn-into-real-estate-goldmines-with-easy-money-mortgages