Does every hard money lender do bridge loans? Where do you find a hard money bridge loan lender?
A lot of people use the term bridge loan interchangeably with gap funding or hard money, but a true bridge loan is slightly different. They’re shorter-term than a hard money loan, and they’re typically less expensive because of that.
Is a Bridge Loan Different from a Hard Money Loan?
A hard money loan is longer and broader than a bridge loan.
The average bridge loan lasts 30 to 45 days. Hard money loans can last up to a year or longer.
Bridge loans get you from one property to the next. Hard money focuses more on a single project.
Bridge loans get paid when your old property sells. Hard money loans get paid when you refinance or sell the property the loan was originally for.
A bridge loan is used as temporary funds to close on a house. A hard money loan can be used as a more general budget for a purchase. Many come with the option for escrows to fix up the property over time.
Typically bridge loans are used for 3 situations in real estate investing. When you:
Are buying a new property and already have one listed for sale
Need to cover down payment on a new property
Find a great deal but your bank’s financing won’t be ready in time.
What Lender Give Bridge Loans?
To find these quick, short loans, a small local lender (like Hard Money Mike) will be your best and fastest option. Smaller hard money lenders prefer working with deals that provide good, safe returns. Bridge loans do exactly that.
A bigger hard money lender will do a bridge loan, too. But they may take up to four weeks to close, which often defeats the purpose of true bridge lending.
You can also get bridge loans from some banks. Not big, national banks, but many local banks and credit unions who work with real estate investors may do bridge loans, too. Banks usually offer the cheapest bridge loans, but can take 3 – 4 weeks or longer.
Ask around to hard money bridge loan lenders you know to learn their pricing and see if it’s worth it. You can use our free loan optimizer to find out if you can get a good deal on bridge loans near you.
https://hardmoneymike.com/wp-content/uploads/2022/09/finding-hard-money-bridge-loan-lenders.png6991048Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-09-04 10:00:312022-09-03 15:24:31Where Do You Find a Hard Money Bridge Loan Lender?
With rising inflation, how will your loans for investing be impacted?
In the past few years, everyone with money rushed into the real estate industry. All that money flowed freely, making real estate investing relatively easy and cheap.
But with rising inflation, that money is now leaving. Here are some changes you can expect around loans for investing.
What Does a Rising Federal Fund Rate Mean?
To combat inflation, the Fed has started raising their rates. They do this to raise the cost of credit, making less money available across the board.
And obviously, this affects us as real estate investors.
When interest rates rise, money tightens up. There’s less of it available for everyone, and lenders adopt stricter requirements.
While this makes loans for investing harder to get, it also means there will be less competition. Many current investors won’t be able to qualify for loans for investing with rising inflation.
What Will Investing Look Like with Rising Inflation?
It’s hard to say when money will start coming into the real estate market again. Lenders don’t know where exactly home prices are going. And property values are one of the main factors that decides the availability of funds.
But while everyone else is running out of the real estate market, you want to be running in. Why? Because that’s when prices will be the lowest. If you have the leverage to get into properties at low prices, you can refinance when interest rates come down. This is how you capture the wealth real estate investing offers.
This is the time you want to buy, yet it’s also the time where loans for investing are hardest to come by.
You’ll need to be prepared and qualified to take advantage of the upcoming market.
https://hardmoneymike.com/wp-content/uploads/2022/09/loans-for-investing-rising-inflation-2.png471991Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-09-01 10:00:002022-08-23 18:22:06Loans for Investing with Rising Inflation: What Should You Expect?
An important part of considering a DSCR loan is understanding the DSCR calculation. All lenders will look at this formula for DSCR loans.
Let’s go through and look at the numbers to find out if your property has enough cash flow for a DSCR loan.
Income & Expenses
The number one thing DSCR lenders look at is income.
For this example, let’s say our rent is $1,000 per month.
The next thing they look at is expenses.
They want to make sure your income more than covers your total costs. They’ll look at: mortgage payments, taxes, insurance, and HOA. Right now, they don’t look at property management costs, but that could change in the future.
Let’s fill out these numbers for our example property:
So, the total expenses for this property are $850. Right away, we can see that income more than covers expenses, and this property cash flows $150/month.
Applying the DSCR Formula
Then, the equation lenders will do to determine this cash flow will be:
Income ÷ Expenses = Cash Flow Rate
Or, in this case:
1000 ÷ 850 = 1.17+
Lenders are looking for a positive cash flow. They want properties with:
Bare minimum: One-to-one. This means your rent at least covers your costs. (Example: Rent is $1000 and your monthly expenses on the property is $1000).
Better: 1+
Best: 1.25+
Download our free spreadsheet to fill out this formula for your properties to see if they’d qualify for a DSCR loan.
https://hardmoneymike.com/wp-content/uploads/2022/09/dscr-loan-formula.png7501048Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-09-01 08:00:112022-08-23 18:03:00What Formula Do Lenders Use for DSCR Loans?
Subject to deals are unique (and potentially confusing). Here’s a subject to example deal – what the process should look like from beginning to end.
Why the Seller Wants a Subject To
A subject to starts with a seller who has a problem. Either they can’t make payments on their property, or they need to move ASAP (got a new job across the country, etc). They can’t sell the property as fast as they need to; or maybe they could sell, but paying 6% realtor fees and 2% closing would leave them upside down.
The seller would rather have someone else take over the property and make the loan’s payments. This saves the seller’s credit and helps them avoid foreclosure.
A subject to helps a seller get out of a messy situation.
Closing the Sale
Once you find a seller, you’ll need to set up your terms. You’ll go through a typical closing, so you can get a title report and check for any existing liens.
You’re responsible for any liens on the property. They may have a first, second, or judgment lien that would become your responsibility. You don’t want to get stuck with a property whose value is way undermarket.
Payment Example for Subject Tos
After closing, you’ll need to set up the payment system to the seller’s mortgage company. Many people use a third-party escrow company. They make the payments to the escrow company, and that company makes the actual payments to the mortgage lender.
A seller’s credit is on the line when they agree to a subject to deal. If you offer to use a third-party company to make the payments, that could give the seller the reassurance they need to go through with a deal.
The escrow company may cost five to twenty-five dollars per month, but it’s a small price to get in on an existing loan with 2.5% – 3% interest.
https://hardmoneymike.com/wp-content/uploads/2022/08/subject-to-example.png6981048Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-08-26 10:00:562022-08-19 18:51:42What’s an Example of a Subject To?
You have to adapt to the changing market. Here’s what you need to know about real estate funding when inflation hits.
Real estate investors need to be in debt. We need leverage. We need the easiest, fastest, cheapest money, no matter what.
So when inflation hits and money tightens, where do you find real estate funding?
Is it possible to take advantage of this time as an investor? Here’s what you’ll need to know about loans when inflation hits.
Loans for Investing with Rising Inflation
In the past few years, everyone with money rushed into the real estate industry. All that money flowed freely, making real estate investing relatively easy and cheap.
But with rising inflation, that money is now leaving. Here are some changes you can expect around loans for investing.
What Does a Rising Federal Fund Rate Mean?
To combat inflation, the Fed has started raising their rates. They do this to raise the cost of credit, making less money available across the board.
And obviously, this affects us as real estate investors.
When interest rates rise, money tightens up. There’s less of it available for everyone, and lenders adopt stricter requirements.
While this makes loans for investing harder to get, it also means there will be less competition. Many current investors won’t be able to qualify for loans for investing with rising inflation.
What Will Investing Look Like with Rising Inflation?
It’s hard to say when money will start coming into the real estate market again. Lenders don’t know where exactly home prices are going. And property values are one of the main factors that decides the availability of funds.
But while everyone else is running out of the real estate market, you want to be running in. Why? Because that’s when prices will be the lowest. If you have the leverage to get into properties at low prices, you can refinance when interest rates come down. This is how you capture the wealth real estate investing offers.
This is the time you want to buy, yet it’s also the time where loans for investing are hardest to come by.
You’ll need to be prepared and qualified to take advantage of the upcoming market.
Getting Real Estate Investment Loans When Inflation Hits
Two of the main players putting money into real estate investment are hedge funds and banks.
Where Money Goes During the Rise of Inflation
During inflation, hedge funds step away from real estate and take their money with them. They won’t jump back into the real estate market until it’s clear where prices will land.
Banks are required by the Fed to raise rates and step back from the real estate investment world for now, too.
Without Banks, Where Do You Get Real Estate Funding When Inflation Hits?
With federal requirements, banks are backing out of the real estate investment market. They’ll only be able to lend to the top percentage of real estate investors.
Banks are lowering their loan-to-values, which increases down payment requirements. Or they’re squeezing investors out of loans altogether with higher credit, income, and experience requirements.
nvestors who used to always be bank-approved are now in greater need for gap funding. Those who primarily relied on bank loans previously are being pulled down to hard money.
Private Lending During Inflation
Private lenders will have more real estate investment loan options than banks during inflation.
Hard money won’t just be for fix-and-flips anymore. Many of these lenders will expand to offer loans that appeal to the typically-bank-approved investors who are shifting down.
And what does this all mean for you?
In your real estate investment career, you’ll have to start expanding.
If you only worked with one or two banks before, now you might need to find six to get the real estate loans you need. And if banks can’t lend at a fast enough rate for you, you should start getting to know the hard money lenders in your area – even if you traditionally don’t go the hard money path.
Lending options will narrow soon. Start expanding your options now to prepare.
Loan Options to Fund Your Investment
When inflation hits, you need to expand your options for real estate funding. This means partnering with a broader pool of lenders. But it also means understanding your loan options to fund your investments.
In the last five years or so, we’ve been in a refinance and mortgage boom, focused on traditional loans like 30-year fixed mortgages.
But when inflation hits, other loans that have always been around will be popular again. Let’s look at a few of these loan options to fund your investment.
Adjustable-Rate Mortgages (ARMs)
Adjustable-rate mortgages, or ARMs, are fixed for five or seven years, then become adjustable. They allow you to get into a property with a .5-1% lower interest rate than a 30-year mortgage.
A lower interest rate with an ARM means better cash flow for your investment.
Interest-Only Loan
With the interest-only loan option, you just pay interest for the first ten years – no principle. This benefits cash flow for investors because you’re not making a loan payment every month.
Interest-only loans work for some strategies but not others. If you’re prioritizing cash flow on properties you know you’ll refinance later, this type of loan could be a great option.
40-Year Amortizations
40-year amortizations are not as popular, but they’re still an important option to consider. A 40-year amortization is an alternative to the 30-year fixed mortgage. Your payments are spread across a 40-year span instead of 30, so your payments are lower.
Using this loan allows you to get into a property with increased cash flow while you wait for home values to rise so you can refinance into a more traditional loan.
Adjust To the Market To Fund Your Investment
For these loan options to work, you have to start getting ready now. Prices will come down soon, and the faster you adjust to the new-normal, the better.
The market will be different than it has been for awhile. Look at different loan options from the past, and work with as many lenders as you can who understand and fund these loans.
No Money Down Investing Options in 2022
When inflation hits, real estate funding constricts. With banks lowering LTVs and raising down payments, your no money down investing options will look different in the remainder of 2022.
Traditional no money down investing options will be harder to come by with limited bank funding. Here are three options to adapt to the changing market if you want to invest with no money out-of-pocket in 2022.
Subject To Properties
Subject tos have been out of favor for a while, but they’ll offer great opportunities in the near future.
When market prices are high and someone can sell a house for whatever price they want, they don’t need the “escape” of the subject to.
Now that prices are coming down, more people will be stuck with properties they can’t sell and/or can’t pay for. More people will be open to you taking over their mortgage so they don’t wreck their credit or foreclose.
Owner Carries
An owner carry is when someone owns a house free and clear, and they carry the mortgage instead of going through a bank. You make mortgage payments to them directly.
They get a better rate than if they sold and kept the money in an account. And you get a better rate than you would trying to take out a traditional loan from a bank when inflation hits.
With owner carries, you usually don’t have to worry about credit, income, or, oftentimes, even down payment. Closing a deal with an owner carry is easier, cheaper money.
OPM Partnerships
Real OPM will be crucial to real estate funding when inflation hits. With LTVs coming down, you’ll need to bring in more money for deals. A HELOC can be helpful, but if you truly want to take advantage of low prices and buy 10 or more properties, it’s wise to partner with real people’s money.
People can get better, more stable returns in a secured real estate note than they would in either the stock market or a bank account. You can set up a win-win deal to receive a loan from a normal person rather than a lending institution.
Real Estate Funding Options in 2022
2022 is the time to expand your real estate investing options beyond the traditional loans.
As banks tighten up, OPM loosens up. Regular people with money will be searching for options to get a decent return during inflationary times.
OPM – Your Top Real Estate Funding Option When Inflation Hits
At Hard Money Mike, we’re major proponents of using OPM for your real estate funding. Especially when inflation hits, and especially as the market shifts.
We’ve specialized in OPM over the past 15 years. You need money in real estate investing, but it doesn’t have to be your money.
Utilizing other people’s money truly benefits both lender and investor alike.
You can approach a family member or friend with all their money in an IRA and offer them a better return. You need a plan, with the right numbers and a secured set up. But as long as you treat their money carefully, people will not only lend to you but recommend you to other OPM lenders too.
When traditional lenders are lowering LTVs and requiring higher down payments, OPM is how you’ll be able to fill in the gaps to actually buy these properties at their upcoming low prices.
How Do You Set Up an OPM Deal?
The secret to OPM deals is making them a win for both parties. It’s not hard to do, you just need to know where to start.
We’d love to help you set up your OPM agreement. We have a lot of experience with OPM, and we want to see it accelerate your real estate career during this market.
When Inflation Hits, Your Real Estate Funding Doesn’t Have To Stop
Many investors don’t understand the money side of real estate investing. Leverage is a huge part of this industry. When inflation hits, it can be scary when you don’t know the right steps.
Learn how to get faster, cheaper, easier money, and how to partner with lenders.
To get help with your real estate investment career during this market, reach out with your questions at HardMoneyMike.com.
Happy Investing.
https://hardmoneymike.com/wp-content/uploads/2022/08/Aug-22-Real-Estate-Funding-When-Inflation-Hits-Blog-Thumbnail.png6001800Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-08-25 10:00:142022-08-22 17:26:49Real Estate Funding When Inflation Hits: Loans for Real Estate Investing
Every loan in the world has its pros and cons – DSCR loans are no exception. The important thing is to be able to evaluate whether it’s right for your property.
DSCR Loan Pros
No Income Requirements
The biggest advantage to a DSCR Loan is that there are no income requirements.
You don’t have to work a W2 job, or be self-employed for 2 years. The application won’t ask where you work or what you do.
This is helpful if you’ve just started a new job, become recently unemployed, or have more unconventional income.
The number one requirement for a DSCR loan is the income from the property itself.
Business-Friendly Financing
DSCRs are considered business loans since the properties are non-owner-occupied. The majority of them allow you to finance in an LLC or other business name.
They also do loans in different states. If you have properties in Colorado and Florida, you can go to one lender and they can lend both places.
Minimal Paperwork
If you’ve ever done a traditional loan, you know the paperwork is a giant hassle. DSCR loans have very minimal paperwork. They’ll need to look at your:
Credit score
Loan-to-value
Rent
And that’s it.
The majority of lenders won’t ask for info on your other properties. They just want to know the other properties are current, and that shows up on your credit report. Even if you have other rental properties with negative cash flow, it won’t impact your ability to get a DSCR loan on a positive cash-flowing one.
As long as you have a property that’s making money, you can get this loan for very little paperwork.
DSCR Loan Cons
Prepayment Penalties
DSCR loans almost always come with pre-pay penalties. You have to keep the loan for a minimum timeframe of around 3-5 years to avoid a fee for paying off early.
So, if you get a DSCR loan, then a year later you find someone who wants to buy, or some other unexpected event comes up and you have to sell the property… You’re stuck paying to get out.
And prepayment penalties can be up to 5% of the loan amount.
Let’s say you have a $200,000 loan with a 5 year pre-pay minimum. And you end up wanting to sell it after 2 years. Then you’ll have to pay the lender 5% of $200,000 – or $10,000 – just to get out of the loan.
Higher Rates Than Other Conventional Loans
Some DSCR loans have 5, 7, or 10-year ARMs that keep rates down. Still, DSCR interest rates will be 1.25 to 1.5 points higher than other conventional loans.
This will impact your cash flow, so a property has to have a strong cash flow for you to consider a DSCR loan.
Pros vs Cons: Are DSCR Loans Worth It?
Despite their drawbacks, DSCR loans can be a truly great option.
It’s a great portfolio loan for real estate investors. DSCR is perfect for people who want something easy, or who don’t have the income traditional loans need.
As long as your specific property fits the criteria and the cash flow is there, a DSCR is a great easy loan to build your portfolio without the hassle of underwriting.
https://hardmoneymike.com/wp-content/uploads/2022/08/DSCR-loans-pros-and-cons.png6991048Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-08-25 08:00:132022-08-19 18:31:35The Pros and Cons of a DSCR Loan
DSCR stands for Debt Service Coverage Ratio, which is a term used in the mortgage industry.
In the real estate industry, a DSCR loan is more commonly known as an “easy loan.”
What is it that makes a DSCR loan so “easy”?
DSCR Loans’ Easy Reputation
DSCR loans are easy because they cut out 50 to 60% of the paperwork required for a typical loan of its kind. If you’ve ever done a loan for a rental property, you know the paperwork seems endless.
All a DSCR loan looks at is whether your property’s rent covers your monthly expenses. At the very least, your rent (income) needs to be higher than your expenses – payments, taxes, insurance, HOA, etc.
The only other consistent criteria for getting a DSCR loan is your credit score. But if you have a good to great credit score and a cash-flowing property, you can get one of these easy DSCR loans.
What Is Special About a DSCR Loan?
Every DSCR loan will be slightly different. You can find a DSCR loan in any shape or size.
Each lender puts their own nuance in their DSCR loans. There’s no national standard for underwriting for these loans. There are thousands of institutions offering these loans, so there are thousands of different versions of them.
For your investments, you can find DSCR 30-year loans, 3 to 7-year adjustables, interest-only loans, and more. DSCRs are useful for their range of options.
But you do have to shop around for each of your DSCR loans. Each lender will have different criteria, and your different rental properties will each meet a different set of criteria.
Take your time finding DSCR loans, and take advantage of their wide variety.
Other Common Requirements for DSCR Loans
As mentioned, DSCR loans can vary widely from lender to lender. But there are a few more common requirements for DSCR loans to keep in mind.
First, DSCR loans typically require 20% down for a purchase. Their refinance max is usually 75%. There are unique lenders out there that will offer more, but a lower down payment will be offset by higher interest rates.
Second, interest rates for DSCR loans are typically around 1.25 to 1.5% higher than other traditional conforming conventional loans.
Third – and this is an important one – DSCR loans almost always come with pre-pay penalties.
You have to keep the loan for a set amount of time, usually 3-5 years. Or else you have to pay the lender a penalty for paying it off early. That means if you sell or refinance, they’ll charge you a penalty.
Lenders will want these loans to stay on the property for a longer amount of time. So they penalize you for ending the loan before their minimum timeframe. Watch for these penalties, and be sure they fit into your guidelines for a project.
https://hardmoneymike.com/wp-content/uploads/2022/08/what-is-a-dscr-loan.png5541048Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-08-18 08:00:502022-08-12 15:00:58What is a DSCR Loan?
Setting up a subject to deal right opens the gate to more money in your real estate investment career. Now, here’s how to take it from a system that generates cash flow to a way to create generational wealth in real estate investing.
To Make Money, Go Big
Volume is how to truly create wealth in real estate investing. Subject tos can be easy and relatively passive, so it’s possible to stretch yourself from five to ten properties to 50 to 100.
But to go for volume, you’ll have to be less picky with the amount of money you put in a deal.
You might have to bring in some money to help the seller move. You may have to fix up a few things in the property. Or you could need to carry the payments for a few months while you find a good renter.
Using OPM to Create Wealth in Real Estate Investing
The number one investment strategy we recommend here is to bring in an OPM partner. This will be a person who’s willing to put in $10,000 to $50,000 in exchange for a portion of rent.
This partnership will allow you to expand quickly. Your partner gets a 5-6% return on their money, there’s still no money down for you, and you get the speed and flexibility that cash gives a subject to.
We have a history of helping people with this part of the process. You can get the start-up cash that will allow your to create wealth by investing in real estate. Reach out at HardMoneyMike.com.
https://hardmoneymike.com/wp-content/uploads/2022/08/CREATE-WEALTH-SUBJECT-TOS.png5891048Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-08-17 10:00:482022-08-12 14:48:22How to Create Wealth with Subject To Real Estate Investing
Not all subject tos and owner carries are created equal. Here are some tips on knowing when a property will be a good real estate investment for you.
Good Real Estate Location
In the upcoming market, don’t settle for properties in bad locations. A good real estate investment is a deal in a good area.
As more foreclosures happen, more REITs and investment companies will buy large amounts of rental properties, creating new “rental areas.” Your target tenants might want to avoid those areas. You might have more success buying in “better” areas.
Good Real Estate Investments – Know Your Goals
When you go into a subject to deal, you’ll need to know the terms that will make the investment worth it to you, along with the goals you’d have for the property.
How long do you want to carry this property? Can your seller agree to those terms? What does your seller require?
What’s your plan? What are your options for this property? Will you want to rent out the property, or look at lease to own or contract for deed options?
In addition to a traditional subject to, lease to purchase and contract for deed deals are worth considering. Those buyers will give you a down payment, which is a lump sum you can use to fund the property’s fix-ups, put in a reserve, or just keep in your pocket.
Subject Tos are Good Real Estate Investments, Even with High Loan-to-Value Ratios
Often, subject tos will have a high loan-to-value ratio. It’s often around 90%, but we’ve seen subject to properties with over 100% loan-to-value.
Naturally, this could give you pause, but high loan-to-value properties are okay for subject to deals. They’re still good real estate investments. As a subject to buyer, you know:
There’s no money out of your pocket.
Rent will cover your payments.
The loan will amortize down.
Over time, you can own the property free and clear, and when the market’s up, you could sell for straight profit.
You can create wealth without even using your own credit.
Subject tos are a good real estate investment if you have no experience or money – or if you do!
https://hardmoneymike.com/wp-content/uploads/2022/08/subject-to-good-real-estate-investment.png7311048Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-08-12 10:00:502022-08-11 18:19:51How To Make Sure a Subject To Is a Good Real Estate Investment
DSCR loans have been around for a few years, and they’re only getting more popular.
These are unique opportunities for funding rental properties. But they aren’t for just any deal.
Are DSCR loans right for you? Could you find properties that qualify? Let’s find out.
What is a DSCR Loan?
DSCR stands for Debt Service Coverage Ratio, which is a term used in the mortgage industry.
In the real estate industry, a DSCR loan is more commonly known as an “easy loan.”
What is it that makes a DSCR loan so “easy”?
DSCR Loans’ Easy Reputation
DSCR loans are easy because they cut out 50 to 60% of the paperwork required for a typical loan of its kind. If you’ve ever done a loan for a rental property, you know the paperwork seems endless.
All a DSCR loan looks at is whether your property’s rent covers your monthly expenses. At the very least, your rent (income) needs to be higher than your expenses – payments, taxes, insurance, HOA, etc.
The only other consistent criteria for getting a DSCR loan is your credit score. But if you have a good to great credit score and a cash-flowing property, you can get one of these easy DSCR loans.
What Is Unique About a DSCR Loan?
Every DSCR loan will be slightly different. You can find a DSCR loan in any shape or size.
Each lender puts their own nuance in their DSCR loans. There’s no national standard for underwriting for these loans. There are thousands of institutions offering these loans, so there are thousands of different versions of them.
For your investments, you can find DSCR 30-year loans, 3 to 7-year adjustables, interest-only loans, and more. DSCRs are useful for their range of options.
But you do have to shop around for each of your DSCR loans. Each lender will have different criteria, and your different rental properties will each meet a different set of criteria.
Take your time finding DSCR loans, and take advantage of their wide variety.
Other Common Requirements for DSCR Loans
As mentioned, DSCR loans can vary widely from lender to lender. But there are a few more common requirements for DSCR loans to keep in mind.
First, DSCR loans typically require 20% down for a purchase. Their refinance max is usually 75%. There are unique lenders out there that will offer more, but a lower down payment will be offset by higher interest rates.
Second, interest rates for DSCR loans are typically around 1.25 to 1.5% higher than other traditional conforming conventional loans.
Third – and this is an important one – DSCR loans almost always come with pre-pay penalties.
You have to keep the loan for a set amount of time, usually 3-5 years. Or else you have to pay the lender a penalty for paying it off early. That means if you sell or refinance, they’ll charge you a penalty.
Lenders will want these loans to stay on the property for a longer amount of time. So they penalize you for ending the loan before their minimum timeframe. Watch for these penalties, and be sure they fit into your guidelines for a project.
DSCR Loan Pros and Cons
Every loan in the world has its pros and cons. The important thing is to be able to evaluate whether it’s right for your property.
DSCR Loan Pros
No Income Requirements
The biggest advantage to a DSCR Loan is that there are no income requirements.
You don’t have to work a W2 job, or be self-employed for 2 years. The application won’t ask where you work or what you do.
This is helpful if you’ve just started a new job, become recently unemployed, or have more unconventional income.
The number one requirement for a DSCR loan is the income from the property itself.
Business-Friendly Financing
DSCRs are considered business loans since the properties are non-owner-occupied. The majority of them allow you to finance in an LLC or other business name.
They also do loans in different states. If you have properties in Colorado and Florida, you can go to one lender and they can lend both places.
Minimal Paperwork
If you’ve ever done a traditional loan, you know the paperwork is a giant hassle. DSCR loans have very minimal paperwork. They’ll need to look at your:
Credit score
Loan-to-value
Rent
And that’s it.
The majority of lenders won’t ask for info on your other properties. They just want to know the other properties are current, and that shows up on your credit report. Even if you have other rental properties with negative cash flow, it won’t impact your ability to get a DSCR loan on a positive cash-flowing one.
As long as you have a property that’s making money, you can get this loan for very little paperwork.
DSCR Loan Cons
Prepayment Penalties
DSCR loans almost always come with pre-pay penalties. You have to keep the loan for a minimum timeframe of around 3-5 years to avoid a fee for paying off early.
So, if you get a DSCR loan, then a year later you find someone who wants to buy, or some other unexpected event comes up and you have to sell the property… You’re stuck paying to get out.
And prepayment penalties can be up to 5% of the loan amount.
Let’s say you have a $200,000 loan with a 5 year pre-pay minimum. And you end up wanting to sell it after 2 years. Then you’ll have to pay the lender 5% of $200,000 – or $10,000 – just to get out of the loan.
Higher Rates Than Other Conventional Loans
Some DSCR loans have 5, 7, or 10-year ARMs that keep rates down. Still, DSCR interest rates will be 1.25 to 1.5 points higher than other conventional loans.
This will impact your cash flow, so a property has to have a strong cash flow for you to consider a DSCR loan.
Pros vs Cons: Are DSCR Loans Worth It?
Despite their drawbacks, DSCR loans can be a truly great option.
It’s a great portfolio loan for real estate investors. DSCR is perfect for people who want something easy, or who don’t have the income traditional loans need.
As long as your specific property fits the criteria and the cash flow is there, a DSCR is a great easy loan to build your portfolio without the hassle of underwriting.
DSCR Formula
An important part of considering a DSCR loan is understanding the DSCR calculation. All lenders will look at this formula for DSCR loans.
Let’s go through and look at the numbers to find out if your property has enough cash flow for a DSCR loan.
The number one thing DSCR lenders look at is income.
For this example, let’s say our rent is $1,000 per month.
The next thing they look at is expenses.
They want to make sure your income more than covers your total costs. They’ll look at: mortgage payments, taxes, insurance, and HOA. Right now, they don’t look at property management costs, but that could change in the future.
Let’s fill out these numbers for our example property:
So, the total expenses for this property are $850. Right away, we can see that income more than covers expenses, and this property cash flows $150/month.
Applying the DSCR Formula
Then, the equation lenders will do to determine this cash flow will be:
Income ÷ Expenses = Cash Flow Rate
Or, in this case:
1000 ÷ 850 = 1.17+
Lenders are looking for a positive cash flow. They want properties with:
Bare minimum: One-to-one. This means your rent at least covers your costs. (Example: Rent is $1000 and your monthly expenses on the property is $1000).
Better: 1+
Best: 1.25+
Download our free spreadsheet to fill out this formula for your properties to see if they’d qualify for a DSCR loan.
DSCR Loan Down Payment
What is the down payment requirement for DSCR loans? What does refinancing look like with this type of loan?
Down Payments for Different Types of Properties
Your typical DSCR loan will require 20% down, but as interest rates are rising, you may see that that tighten up to 25%. So, if you’re buying a $100,000 property, they’ll loan you 80%, or $80,000. But you’ll have to come up with the remaining $20,000.
If you go from a single-family to a four-plex (some DSCR loans work for up to six-plexes!), you may be required to put in more like 25-30%. As your “doors” go up, so does your down payment.
But always check around! DSCR loans are the wild west. You’ll have lots of choices, every lender likes having slightly different requirements.
Refinancing with a DSCR Loan
For a rate and term refinance, a DSCR loan will typically cover 75%.
So you’ll need 25% equity in the property on a DSCR loan to do rate and term.
Cash out refinancing is a little tighter. Most are at 70%, but you could find outliers between 65 and 80% (but the higher ones will raise your interest 2 or 3 points).
For true, good DSCR loans, you’ll be maxed out at 75% for rate and term, 70% for cash out.
Let’s say you’re looking at a property that’s worth $100,000. On the cash out, you can only get $70,000, and you’ll need $30,000 in equity. For rate and term, the max loaned is $75,000.
At the end of the day, it’s impossible to give a one-size-fits-all answer about DSCR loan amounts. There are so many options, and your properties will each require different loans. You’ll have to talk to brokers and lenders in your area to find the best rates for you.
Using DSCR with BRRRR
If you’re lucky, the rental property you’re getting into is a BRRRR property. You can use a DSCR loan like any other traditional conventional loan to refinance.
Short answer: yes. However, you may come across a few obstacles.
Using Standard Rental Rates
Typically, to refinance an Airbnb, a lender requires 2 years’ history of rents and expenses for the property.
If you can’t provide that, a DSCR loan could be an option for your short-term rental.
But to get the DSCR loan, you need to use the standard rental rates for a standard rental property in that area. Without a longer history, you can’t use your Airbnb rates as the income for the property.
This can be a major hurdle.
A property that’s successful with short-term rentals (Airbnb, VRBO, etc.), probably makes more money than a standard monthly rental in the same area. In fact, the monthly income from an Airbnb can be 3-4x the standard rents in an area.
But a DSCR will require you to use the number for standard rents. So it’s possible that even though your short-term rental is cash-flowing, it might not qualify for a DSCR loan.
Lenders and Airbnb Investing
DSCR loans vary from lender to lender. Three-quarters of DSCR lenders will be open to loaning for Airbnb properties. The other quarter will want nothing to do with it.
Some lenders look at Airbnb as a riskier investment. Cash-flow has the potential to be higher, but there are a lot of moving parts. Also, some municipalities put restrictions on short-term rentals, making them a more unpredictable investment in lenders’ eyes.
It’s still worthwhile to research a DSCR loan for your Airbnb. You should always shop around – you’re bound to find the right lender with the right loan for your project.
What Other Loans Are Available to You?
DSCR loans are unique, great opportunities for some rental properties. If you have more questions about DSCR, don’t hesitate to reach out at HardMoneyMike.com.
And if you’re curious about your other loan options as a real estate investor, try this free lending options download.
Happy Investing.
https://hardmoneymike.com/wp-content/uploads/2022/08/Aug-2022-What-is-a-DSCR-Loan-Blog-Thumbnail.png6001800Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-08-11 08:00:072022-08-15 14:14:05Understanding Real Estate Loans: What Is a DSCR Loan?
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