What Is a DSCR Loan - Understanding Real Estate Loans

today we're going to talk about dscr loans what they are who they're good for who they're not how they help you make money maybe when you don't have the experience the w-2 income or even if you just want an easy loan so today you might have heard about them they've been around for a few years and they're getting more and more popular so let's dive in and see what a dscr loan is [Music] let's make money money money money mike.com so what is a dscr loan it really stands for debt service coverage ratio is just a term that's used in the mortgage industry but really what it is is we call it an easy loan because it takes out a lot of the paperwork probably 50 60 percent of the paperwork and if you've ever done a loan for a rental property or rental portfolio you know there's a lot of work so the debt coverage service ratio loan is the easy loan because all it does is it looks at your property your rental property and does the rent cover your monthly expenses so as long as at the very least your rents cover the expenses the payments the taxes the insurance the hoa and you have a good to great credit score you could get what they call an easy loan or a dscr loan um the industry out there is it's a little bit different than your standard loans your traditional loans where you have to do all the paperwork dser loans come in many shapes many sizes each lender has their own nuances because there is no national um you know underwriting for dser loans so there's literally hundreds of different programs out there with little tweaks and there's thousands of different entities offering these these products out there so you really do have to shop around you really do have to look for them but if you're looking for a loan that will finance your investment properties and 30 years 30-year loans three five and seven year adjustables interest only anything like that dscr loans are a great option that you have to at least look at the biggest difference is you're going to have to shop around look at different lenders because each of them will fit a different criteria for a different loan or property that you do have so dser loans they are going to typically require like 20 down for a purchase if you're doing a refinance the max is usually 75 now like i said there are some unique lenders out there who may offer a little bit more but you're going to pay for those in higher rates and rates on dscr loans are typically around one and a quarter to one and a half higher than your traditional conforming conventional loans like fannie mae and freddie mac the other unique thing on dscr loans unlike standard loans they almost all come with prepay penalties and what that means is you're going to have to keep the loan for a certain amount of time usually it's three or five years or you will pay the lender a penalty for paying it off early that means if you sell it or refinance it they're going to charge you some kind of penalty because when they get into these loans they want the loans to stick around for at least a certain amount of time that's what they're anticipating when they're they're lending you the money so unlike traditional loans they are going to come with prepay penalties so you're going to have to watch that make sure it fits into your guidelines and understand those prepay penalties even if you sell it or refinance it you're going to pay those if you do not hit at least their minimum time frame for the dscr loans so let's look at some pros and cons of dc dscr loans i mean the biggest pro is that they don't require income from you personally you don't have to have a w-2 job you don't have to be self-employed for two years they don't even care about that that doesn't that should not even be on the application where you work what you do so technically you could have just became self-employed one day before you could have just started a new job none of that matters so the biggest benefit here is especially people who are starting out in this industry you have a loan product that you don't have to have two years of history to make it work they're just going to go off of the rents on that property so that is a huge benefit another benefit is the majority of them allow you to keep them in llc's finance them in llc's or any other kind of business and the majority of them also will do loans in multiple states so if you have properties in colorado and florida you could go to one lender and they can lend anywhere because what they are considered business loans since they are non-owner occupied so as i mentioned if you've ever gone through a loan underwriting it was through the traditional or other non-qm loans you find out that there's a lot of headaches a lot of work a lot of paperwork they need and it never seems to stop the beautiful thing about dser is it's a simple loan they're going to look at your credit so you have to have good credit they're going to look at your loan to value and they're going to look at your rents that's it you don't the majority of them you don't have to give them all the information on your other properties and also you can have other properties that are negative cash flow and it doesn't matter because they're not going to look at them they just want to make sure the other properties are current and that'll come up on your credit so as long as you have a property that's making money you could get into a loan like this with little to no paperwork now what are some of the cons to the dscr loans number one like i said is the the prepayment penalties i talked about that in the first segment but prepayment penalties especially if you find someone who wants to buy it or you want to move on or something comes up and you have to sell the property prepayments can be up to five percent of the loan amount so if you have a 200 000 loan and you have a five year prepay and you want to pay it off or sell it or something in two years you're gonna pay them five percent of two hundred thousand or ten thousand dollars just to get out of the loan so that's a huge difference between like a dscr loan and a conventional or some of the other non-qm loans that are out there so you really have to look at that the other thing are rates are of course higher than your on the conventional side they do have some good products now coming out you know with some five or seven or even ten year arms that keep the rates a little bit lower but you're usually going to pay somewhere between you know point a quarter point and a half at the very least higher than conventional so it will impact your cash flow so it has to be a very strong cash flowing property to look at a dscr loan so dser loans are a great option it doesn't matter if you're looking for you know a 30-year fixed interest only all they come in all shapes and sizes it is a great loan it's a great portfolio alone it's ideal for those people who want something easy um who don't have the income that traditional banks need and they can then the property's cash flow and it can take on that extra you know one and a half to maybe even two points depending on where your credit is in you know in mortgage interest rates and stuff like that so as long as it fits and as long as the cash flow is there the dser loan is a great loan an easy loan and it's a way for you to keep growing your portfolio without going through all the hassles that underwriting and traditional loans require so part of understanding the dscr loan is understanding the dser calculation because all lenders are going to look at the calculation the dscr calculations so i want to go through and actually do the numbers so you could take this we actually have a little little excel spreadsheet on our website if you want this particular way of calculating you can get that too we'll have a download below but but let's look at an example so you actually could do this run this by your your own numbers make sure it's cash flowing for you because you're gonna have to know your mortgage payment and stuff so let's look at a dscr calculation and how lenders look at it so number one the one thing they look at is the income so let's just say our rent for this property is one thousand dollars a month so that's our income on the property it says the next thing that they're going to look at is what are the expenses what are you paying out because they want to make sure that this will cover your your total cost they and they look at mortgage payments taxes insurance h-way at this point in time they do not look at property management or anything else like that but things can change so let's look at an example here of a mortgage payment being 500. your taxes you know being a hundred dollars your insurance being let's just call it fifty dollars and your hoa 200 dollars so every month these items go out and that's what they're looking at what are your monthly costs so we have 850 here so right off the bat you see you could see that this property cash flows uh positive 150 dollars and that's what they're looking for too they're looking for this property to cover it so we want to make sure that this calculation is correct so the expenses into the income shows that our debt ratio or our income is greater than our output so here we have a ratio and i'm just going to check the numbers again 1.17 plus so this is what the lenders are looking for they're looking for something that's a positive cash flow they're looking for something that has a minimum of one to one meaning your rents will at least cover this mortgage that is the minimum requirement for dser loans now there are no dscr loans out there where this could be higher than this but you're going to pay a lot more in rates but those products are out there too we're talking about the pure true dscr but what they really like is they like to see this number at least at one one plus because they know if you have rents and they are more than your expenses if anything comes up you have a little bit of you know leeway there and they love to see properties that bring in 125 basically over what your rents are so you're actually cash flowing you're actually putting money into your pocket but at the very minimum all you have to do is have your rents cover your expenses and the simple calculation is just divide the the cost of what your your monthly expenses into the rents that you're receiving that's all the calculations they do that's all they're looking for in this loan so without all your tax returns without your w-2s without verifying all these other properties that's what makes the dscr loan so attractive so easy for people and it's really something that can help you grow your portfolio and your cash flow as long as just like you you want to make sure your rents are higher than your expenses so does the lender so that's how you calculate and we'll have a little spreadsheet on the bottom that you could also use to quickly calculate where your dser is for any property to see if your property even qualifies for a true dscr loan so another thing to understand on dscr loans you know what is the down payment requirement what do you need or how do you what is the maximum you could cash out or rate and term that's we're going to go over here like what are the terms what are the requirements for the down payment and also where does that money come from so number one if you're lucky you're getting into this and you actually borrow property where you buy it under value use a hard money lender you can use dscr just like any other traditional conventional loans to actually refinance in and if you buy it right if you buy it in that 75 or below you could actually use a dscr loan and buy a rental property with zero down you'd have to go through look at some of the burr videos how you do that how you find that magic number and everything else like that but typically what you're going to find are dser allowance or just like any standard loans your typical loan right now for dser is 20 down now things might tighten up we've seen a couple lenders actually go to now 25 down as rates go up things tighten up so you have to watch that but typically it's 20 down that means if you're buying a hundred thousand dollar property they're gonna lend you eighty percent of that or eighty thousand dollars you're going to have to come up with twenty thousand dollars for your down payment so uh pretty much like most standard loans that's what you're going to find the real estate investment as you go up if you go from a single family to maybe a four plex and some of these dscr loans even work for five plexes up to six plexes you may be required to put in the 25 to 30 percent as your doors go up sometimes your down payment will go up too check with your lenders as we said in this segment before there are a lot of different programs dser is like the wild west everyone has their own uniqueness uniqueness that they like in the loans so there's a lot of different choices out there so the other thing is if you're just refinancing a property if it's a rate and term which means you're just paying off the old mortgage you're not taking any cash out above like one percent typically you're looking at 75 percent in this market for rate and term so you're going to need 25 equity in the property in a dscr loan just to do the rate and term on cash out they're a little bit tighter some of them are 65 most of them are at 70. i'm not saying you can't find an outlier that maybe even go up to 80 but you may go up two or three points on your interest rate too i'm talking about the the true you know good rates good loans on dscr loans you're going to be maxed out at 75 percent for rate and term cash out seventy percent so if you're looking at a property if it's worth a hundred thousand on a cash out you can only go to the seventy thousand dollars you need that thirty thousand dollars in equity if you're doing a rate and term seventy five percent or on 100 000 property you must have the maximum they'll lend you is the 75 000. so a lot of standard items here but like i said there are so many different programs there's so many different people out there talk to different brokers talk to different people find out the ones who have many options we do dscr loans we have at least 20 different lenders that give us different options for different programs a dscr loan from one company may fit you perfectly for one property and may not fit you for the other so make sure you shop around look around and get the best terms that are for you and your property to maximize cash flow because that's why we're in this keep the cash flow increasing the cash flow make sure the property is bringing you in money not costing you money as you go through the last part we're going to go through in dscr loans and where they work are the dser loans at airbnbs can you buy an airbnb with a dscr loan and the short answer is yes there are some other hurdles you have to go through and look at but typically what a lender will look at for an airbnb is two things do you have you're going to refinance it do you have a history do you have two years of history that you can actually look at the rents look at the expenses for that particular property and use it to qualify if you can't do that and you want to do a dscr loan on a short-term rental airbnb vrbl whatever you call it you're going to have to use the standard rates the standard rental rates for a standard standard rental property in that area so you're not going to be able to use the ds or the vrbo airbnb income if you don't have established for at least a couple years so if you're buying an airbnb and it doesn't have any history and you're using dscr loans what you're going to have to do at the best is they'll let you use the rates that other people in the area charge for standard rentals sometimes that's a big hurdle because people when they find a good property that's good for airbnb they might pay a little bit more they may stretch it a little bit more because they're looking at you know bringing in rents that are anywhere from two to four times that of the standard rates so it may not qualify which means you may have to bring in more money lenders for some reason still look at airbnb as a little bit riskier and i think there's because there's moving parts there there's management there's you know municipalities who are making them illegal so then they have to revert back to either a traditional loan or standard so you're going to find as airbnb dser loans will work they'll probably work with at least 70 80 percent of the people out there lending dscr loans the other 30 don't want anything to do with it so once again shop around the biggest thing with investing in the money side there's a ton of money in the money and the less friction you have on the money side the better you're going to be long-term investors so shop around look around because you might go to one uh bank or entity and they'll be like we don't do dscr loans we don't even know what that is number two they may say we don't do any vrbos you just have to shop around find you know reach out to some of your friends um that you know who are investors go to bigger pockets wherever it is find the lenders who do this because you can buy properties that are airbnb with dser loans you just have to find the right company and the right company that'll give you the maximum loan to value because some of them will cut you down to 70 percent and you really want to find the ones that will do 80 and they're the ones who will use the standard rates and rents in your area to qualify for that property even if it's going to be an airbnb i know a few other people what they've done in the past is they started out as a short-term loan it started out as a traditional rental i mean and then they moved it later after two or three years into the short-term loan and one thing to understand because some people kind of get confused you can do the conversion as long as your intention going into the loan was to keep it as a traditional rental property you can convert it later to an airbnb and you don't need to let your lender know anything else like that just keep making the payments they don't know year to year where your rents are going they don't know your year what you're doing with the property if your intention was when you bought it to have it as a traditional rental property you could do that and then convert it later you know a year two years whenever you want into that short-term rental so that's also a strategy that i've seen people do start them out as regular rentals and move them to the airbnb so today we went over dscr loans where you could use them the pros the cons everything else like that if you have any questions reach out to that to us we'd be glad to help you with any questions how to calculate how to figure out if there's an option for you we'd be glad to hear from you also we have a download below that you could look at other lending options because dscr is just one lending option so what do banks do what do other mortgage brokers do what are your other options just besides dser you should understand all your lending options for all your real estate investing needs because you know like we say there's money in the money if you can understand the money side and make it easier faster cheaper life in real estate investing is going to be good for you now if you're new to real estate investing dscrs anything else like that you really need to understand the money side because there's money in the money this is half at least of real estate investing is not only understanding the money but finding the money finding the cheapest fastest easiest money you can find to put less friction in your business we have something we call the 30 day fuel up challenge course and what it does is it helps you understand a little bit more about the money it helps you find the money people from the banks to the hard money to just traditional opm we call it other people's money just people off the street it's something you need to understand if you want to be a successful investor so we'll have a link below come and join us get a get ahead of the competition understand the money side only about ten percent do and will do that be that ten percent because it's going to make your investing a lot easier a lot faster and you're just going to make more money doing this so enjoy your day thanks for joining us and we'll see you on the next video [Music] [Applause] [Music] you

Channel: Hard Money Mike

Views: 17,493

Keywords:

Id: Af7KqIfwfcM

Length: 22min 3sec (1323 seconds)

Published: Thu Aug 11 2022