The DSCR loan is quickly becoming known as the “landlord loan,” and for a good reason. Investors in single-family homes commonly use LLC entities to limit their personal liability for an asset. It essentially protects them from lawsuits and separates their investments from their personal assets.
Until recently, the best lenders for LLC loans have been local banks, but that’s all changed with the DSCR loan. During the pandemic, interest rates plummeted in an effort to keep the market afloat. Therefore, the interest rates of DSCR loans became competitive with smaller bank offerings. Consequently, seasoned and new investors flooded the market, contributing to the outstanding price growth across most of the nation.
What is a DSCR loan?
A DSCR (debt-servicing coverage ratio) loan looks at a property’s income or potential income to qualify for a loan, instead of a conventional loan that looks at a borrower’s personal income. A DSCR loan makes it possible for investors to buy properties without any income or employment verification. The lack of personal income requirements makes it an excellent option for purchasing within an LLC.
During the underwriting process, a property’s running costs, including property taxes, insurance, and projected repairs, will be offset against its income to determine the asset’s net operating income. The debt-servicing coverage ratio is a ratio of NOI to debt-servicing.
Buyers using a DSCR loan will need to be prepared to order a full 1004 form appraisal and 007 Single-Family Comparable Rent Schedule. The property does not necessarily need to be leased at the time of purchase; however, it is required to accurately assess its potential income-producing capacity. The underwriter will also take the borrower’s FICO score into account.
Why are investors choosing DSCR loans?
With the drop in interest rates during the pandemic, DSCR rates became competitive, making them an excellent resource for expanding property portfolios. Previously, DSCR loan interest rates were so high that it made it challenging for many borrowers to stomach their debt costs.
While interest rates are on the way back up, interest rates are still competitive enough for a DSCR loan to be a viable product for real estate investing. These loan products come with various loan features, however, the 30-year fully amortized DSCR loan is probably the most popular.
Borrowers concerned about a higher interest rate with a DSCR loan can always look into refinancing with a conventional product down the road. However, DSCR loans are an incredible product that enables investors to take advantage of quickly rising prices without any income or employment proof provided.
Investors looking to buy should contact one of our loan specialists. We can help run through your loan options and assess a potential investment to gauge whether a DSCR loan is the right product for you.