DSCR Loans Explained: 100% of Rent Counts, No Tax Returns

DSCR loan vs conventional financing: which one is right for your rental property purchase? In this episode of the DSCR miniseries, Ryan Marks explains why investors and self employed buyers choose DSCR loans even when conventional financing looks cheaper on paper, and how to pick the right loan program for your long term portfolio strategy.

You'll learn:

• Why DSCR loans skip tax returns and income docs entirely, and who benefits most
• The loan programs available: 30 year fixed, adjustable rate, and interest only options
• How conventional loans only count 75 percent of rent while DSCR counts 100 percent
• Why reserves and vacancy planning matter before you buy
• How bridge financing unlocks equity to grow your portfolio

Connect with us and explore tools and resources at https://www.seimortgage.com

Ryan Marks | NMLS #519138 | SEI Mortgage | Equal Housing Lender This content is for educational purposes only and is not a commitment to lend.

#DSCRLoans #RealEstateInvesting #NonQM #RentalPropertyLoans #SelfEmployedMortgage

Transcript

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On today's episode of the DSCR mini series, we're going to further unpack the financing options, the difference between going conventional versus non-QM DSCR, what loan programs are available and how to best utilize them to take the stress out of the buying process if you are building your real estate portfolio or you're brand new and looking to purchase your first property? I'm Ryan Marks, host of the SCI Mortgage Channel and Podcast, and we are dedicated to those of you who are self-employed or property investors looking to build your real estate portfolio. Let's get into it. So, how does a DSCR loan, which generally has higher interest rates and typically higher fees versus a conventional financing loan, why you'd want to take that route? Well, there's a few reasons why you'd want to utilize the DSCR. The biggest one being is the path of least resistance. If you have very complicated tax returns, lots of businesses, let's say you have W-2 income, side hustles, but you write all that income off and it becomes difficult for you to meet the debt to income ratios. The DSCR loan does not use any tax return or income documentation whatsoever. The rent of the property is your qualifying factor when utilizing the DSCR loan. So in the previous episode, we talked about how to use debt coverage, what the debt coverage is and calculators available. So this episode, we want to talk about the loan programs that you can utilize on a DSCR loan. They go from the standard 30-year fixed mortgages to adjustable rate to interest only payment options. On an interest-only payment option, typically it's a 30-year fixed mortgage, but you have the ability to make an interest only payment for up to 10 years. So typically, nobody keeps the 30-year IO for the 10 years. What it's used for is a bridge in between essentially maximizing your positive cash flow if you're looking to write the property to get more fair market rent, or you're looking to increase the rent by upgrading the property or doing some rehab work in order to get fair market rent for the property. So it's important that when you talk to a loan officer, you talk to us, we're gonna go over what the long-term plan is for this property. So we make sure that you're utilizing the best program available, maybe up front, but what the big picture is over time. And if you are utilizing an adjustable rate mortgage product, typically five, seven, or 10 years, again, you're taking advantage of lower rates up front, but you want to make sure that you have an exit strategy because if rates do increase, or more importantly, you're in an adjustable rate mortgage when rates decrease, that may be a time to have a conversation to move into that 30-year fix if you can get the same rate for the long term. The other difference between conventional and DSCR loan financing is on an investment property, you have to put a 20% down payment, which is typically standard for a DSCR loan, but they do offer down payments as low as 15%. Some other things to consider before you purchase an investment property and use the DSCR loan is what is the vacancy risk and reserves factor. So when you qualify using a conventional loan, even if the property is already currently renting, the bank is only going to use 75% of the rent. That's typically a 25% vacancy factor. And they do this to account for if you have to evict a tenant or you don't have a tenant in place and you're working to get a tenant, you may be making those payments on a monthly basis for a few months until you have a tenant occupied, which is essentially paying for your mortgage or, furthermore, positive cash flowing. Whereas the DSCR loan, we're going to use 100% of the rent regardless of the vacancy factor. So if you don't have a tenant in place on the property that you're purchasing, we're going to use the average rents from the appraisal received. Or if you have a tenant in place, we're going to use that rent and 100% of that rent received for either rent comps or the current tenant in place. So you want to have some reserves in place for those what if situations. I've heard horror stories where it can take on average eight to ten thousand dollars if you have to go through the eviction process. In addition to that, you're not making any money on your monthly rent. So you're having to make those payments yourself. And more often than not, you're going to probably have to do some improvements on the property once you finally evicted the tenant before you can rent it out and get fair market value. So make sure you have some reserves available. It's important to go in, even if the property's positive cash flowing, to have typically a three to if you can, six month reserve availability just built up for each property that you own in your portfolio. You also want to have an exit strategy as you continue to build your portfolio. There's so many nuances that you can do with these homes. For example, bridge financing is available. If you own multiple properties and you're trying to maybe shift into the commercial space, and let's say you have a lot of equity built up and two, three, four properties, you can essentially leverage all properties on one loan to access cash in order to purchase another property and use it for the down payment or purchase that for all cash. But you have to understand how those financing terms work and how that's going to affect your overall positive cash flow. By just continually stacking more properties in your portfolio does not necessarily mean it's going to be a better scenario for you as you build your real estate portfolio. But buying smart properties that are going to positive cash flow and owning less of them would do just as good, if not better, in the long term, because at the end of the day, your main concern should be how much am I positive cash flowing overall on my portfolio as a whole? And maybe that's only four properties and someone else is doing it with 10, 15, 20 properties. Now, obviously, if you're in a market where buying a property, a single family residence or even a multifamily up to two to four units, maybe a lower ticket price than say purchasing somewhere in California, you can acquire more properties faster to build your portfolio, but you just have to make sure that they're debt coveraging properly and what that space looks like, whether you should be moving into the multifamily or moving, or your buy box maybe is just these single family residences as you continue to grow your portfolio. So if you are thinking about purchasing another investment property to build your portfolio, or you are brand new to the investment space, we'd welcome the opportunity to connect with you, learn about what your buying goals are and all of these great financing programs available. Head over to SCimortgage.com where you can get in touch with us, and we have a lot of other great tools and resources available. And until then, remember to let your income work smarter, not harder. We'll see you on the next one.