How DSCR Loans Work: Qualify With Rent, Not Tax Returns

How do DSCR loans work? In this episode of the DSCR miniseries, Ryan Marks walks through the exact math lenders use to qualify you based on the property's rent instead of your tax returns, using a real 300k purchase example, plus the features that make DSCR loans the go to tool for scaling a rental portfolio.

You'll learn:

• How to calculate your debt coverage ratio and the number you need to qualify
• What happens if your ratio falls below 1.0 and how to still get financed
• Why conventional loans cap you at 10 financed properties while DSCR has no limit
• How vesting in an LLC and staying off personal credit protect your buying power
• The appreciation vs cash flow mistake that sinks new investors

Run your numbers with our free DSCR calculator and get in touch: https://www.seimortgage.com

Ryan Marks | NMLS #519138 | SEI Mortgage | Equal Housing Lender

Transcript

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On today's mini series of the DSCR loan, we're going to cover why investors use DSCR loans, how to calculate a payment to see if it debt coverages, further breakdown how the DSCR loan product works and some things you should avoid. Let's get into it. Welcome back. I'm Ryan Marks, host of the SEI Mortgage Channel and Podcast, and we're here to just put out great content for you. If you are self-employed or you're a property vestor looking to jump into the market or further build your portfolio, we unpack all the great loan products available. And today we're continuing the mini-series on the DSCR loan. So let's get right into it. Let's say you're purchasing a property for $300,000, you're putting a 20% down payment, which would give you a loan amount of $240,000. And at an estimated interest rate of 6.75% on a 30-year fixed mortgage, the payment, including taxes and insurance, totals around $2,000 a month. In order to qualify for the debt service coverage ratio loan, you need to, on average, just cover the minimum monthly payment with the rents received. So for example, if your payment is $2,000 all in and you are renting the property for $2,000, that is a one debt coverage, which means you are covering the debt with the minimum monthly payment and you're breaking even. That is typically all you need to qualify for a DSCR loan. However, it's important to keep in mind that the greater your loan debt coverage is, the more beneficial your interest rate will be and you would receive potentially lower interest rates or better terms available. And on the flip side of that coin, if your debt coverage does not meet that one debt coverage or greater, there is still financing available. You just may have to increase your down payment. If you want to calculate what your debt coverage is, I've included a link below to a free calculator that will analyze your debt coverage to see if you meet the DSCR requirements, in addition to ways to get in touch with us as well. So, how does the DSCR loan help property investors looking to scale their portfolio of 10 properties or greater? Well, on conventional loans, right now, there is currently still a limit. If you have more than 10 properties financed, you cannot utilize the standard full documentation conventional loan financing. You are limited at 10 properties. Currently, on the DSCR loan, there is no limit on the number of properties that you can own. So it's important to remember that how you structure your portfolio will mean the difference of how you're able to scale. Maybe you want to use the DSCR loans to scale up your portfolio. And when you want to take advantage of the traditional conventional financing that does offer generally lower interest rates in that space, you would then use those conventional loan financing or just continue to use the conventional loan financing until you've hit that cap and you're forced to use the DSCR loan moving forward to further scale your portfolio. Some of the advantages of the DSCR loan are we welcome the opportunity for you to vest the property in an entity or corporation. That means you can have the property vesting in an LLC that you've just created while you're under contract, vest that loan in the property to further protect that portfolio. In addition to that, most of these DSCR loans do not report on credit. So why that's so important to understand is if you're looking to purchase another property and go conventional financing, whatever reports on credit is taken into your debt-to-income ratio. So if you're looking to level up on your primary residence and you have existing mortgages for rental properties, those payments are going to be taken into consideration when qualifying for financing. Whereas if you're utilizing a DSCR loan that does not report on credit, there is no debt to income limits on the DSCR loan. So that means again, if you are qualifying the payment solely based on the rent and you debt coverage on average one or greater, there is no additional requirements other than meeting the minimum credit score, which is generally 600 or higher. And as of right now, the general down payment is standard at 20%, but we do offer financing as low as 15%. There is stipulations with that. So don't get too excited. It's a lot harder to qualify when you're only utilizing a 15% down payment because there is no monthly mortgage insurance on that loan. So you have to make sure that the property is a good, strong winner and positive cash flow. So generally speaking, use the rule of thumb of a 20% down payment or greater. Some things to keep in mind when you're looking at financing, which we'll further unpack in another episode, is if you're utilizing a 30-year fixed mortgage and there is interest-only payment options available, if you're looking to bring the property up to fair market value in order to at least break even while you get the rents up to fair market value by putting the work in the home or changing out tenants for what current rents are available in your market. The last thing I want to cover on this episode is appreciation versus cash flow. So what's important to remember is a property can go up over time, but losing money on a rental property up front is not the way you want to go. So when you're penciling your numbers out to see if this is a good property that you want to take on and add to your portfolio, does it break even at the very least or positive cash flow? And if it's only breaking even, you don't want to simply rely on the appreciation over time. You want to look at the strategy of what I can do to further increase the rents if I buy this property where it may not be quite performing how it's supposed to today. But later on, once I do work to the property or I increase the rents over time, then it will become positive cash flow and it will continue into the future as the property continues to appreciate. Hopefully, you got a few takeaways on this episode in the mini-series DSCR loan product. If you like the episode, please like and subscribe. We only put out good content that is related to self-employed and property investors. And to get in touch with us, you're welcome to head over to SCIMortgage.com. We'd welcome the opportunity to hear about your story, what we can do to be a vehicle for financing, and provide you with a long term plan to further build your real estate portfolio. Until then, remember to let your income work smarter, not harder. We'll see you on the next one.