A DSCR loan calculator that shows the best loan to secure future cash flow.
There are two items you need to calculate DSCR: income and expenses.
Income is the rental income from the property. And for expenses, lenders only look at four costs: mortgage, taxes, insurance, and HOA. The debt service coverage ratio essentially compares the income to the expenses.
To make this calculation simple, we have a free DSCR calculator that you can use to find all this information.
Let’s go over an example of how to use this calculator to learn your DSCR and the best loan product for your property.
The Numbers You Need for a DSCR Calculator
The main numbers you’ll need to bring to the calculator to get an accurate DSCR are the property’s expenses and its income.
Firstly, we need to nail down the relevant expenses to input into our DSCR calculator.The first of these is the mortgage payment.
The two pieces of information you need to know are:
What is the purchase price of the house?
What LTV will you qualify for?
The calculator finds out the mortgage payment for you. Let’s say our property is $300,000. You may need or qualify for an LTV anywhere between 65-85%, but we’ll just go with the average of 75% for our example. Our loan, then, is $225,000.
Let’s say we qualify for a 7% interest rate. You’ll also input that number. Then the DSCR calculator will show the total monthly payments on three different products: interest-only, 30-year amortized, and 40-year amortized.
Taxes, Insurance, HOA
For these final three expenses, you might already have the hard numbers available for the property. Otherwise, you’ll have to make an educated guess based on your area.
For our example, we used:
Property Taxes: $150
HOA (only applicable depending on your neighborhood): $150
Lastly: the property’s rental income. You may already have a tenant with a set rental rate. In that case, use that number. If you’re not currently charging rent, you’ll have to do some research on other housing in the neighborhood to see what you can realistically charge your future tenants.
In our example, we’ll say we get $1,700/month from this property.
The DSCR Loan Calculator’s Results
As shown below, the DSCR calculator shows you the costs, rents, and ratios of three possible DSCR products: an interest-only, 30-year AM, or 40-year AM.
This comparison gives you a look at different cash flows from different loan products. This can help you decide which loan you should apply for. You’ll have to consider both loan length and cash flow.
In our example, the interest-only loan is over 1, so that one will likely give us the best rate, best LTV, and highest cash flow.
The other two loan options are just under 1. There will still be some options on the market for DSCRs under 1, but you’ll have a higher interest rate.
https://hardmoneymike.com/wp-content/uploads/2023/01/Dec-22-DSCR-Quick-Calc-Blog-Thumbnail-1.png6001800Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2023-01-13 15:25:512023-01-13 15:25:51How to Use the Quick DSCR Loan Calculator
3 quick tips from a lender on how to qualify for a DSCR loan.
In the real estate investing biz, you need to become fast friends with the DSCR loan.
DSCR loans are great for getting out of hard money on fix-and-flips you end up wanting to keep. They’re also a great alternative to traditional loans for any rental property.
While traditional loans have universal (and often strict) underwriting guidelines, DSCR loans are a little more individualistic. Each lender is their own gatekeeper to their DSCR loans
Even though qualifications vary from lender to lender, we want to share with you 3 steps that will always move you toward a DSCR loan approval. Here’s how to qualify for a DSCR loan in 3 steps.
1. Credit Score: Understanding Your Credit
Your credit is the main factor that lenders consider when evaluating your loan application.
Many lenders (especially in the current tightened lending environment) will zero in on your credit score. But all lenders will at least check your report to look for foreclosures, bankruptcies, and your history in general.
Often, though, a higher credit score can get you a better loan-to-value (LTV) ratio and a lower interest rate. For example, a 740 score will get you an LTV 5-10% more than a 640 score. Your interest rate with a 740 score will be .5-2% lower than the interest rate with a 640 score.
If your credit score is below 700, you should take steps to improve it – such as paying down credit card debt and making sure all your payments are on time.
2. Money: Down Payments, Closing Costs, and Reserves
In addition to the down payment, you’ll need to have enough money for closing costs and reserves.
Down payment will be 20-30%, depending on your credit. It’s also important for you to know how much equity the house will have, as this will predict some of your loan terms.
For reserves on a DSCR loan, lenders often require you to have 3-6 months’ worth of mortgage payments. This extra cash protects the lender in case your tenant unexpectedly vacates or some other unexpected situation arises.
The money doesn’t necessarily have to be yours – you can borrow OPM from a business partner, friend, or family member. To get a DSCR loan, though, your lender will want to see the funds for a down payment and reserves to approve you.
3. Know Your Numbers: Property Income and Expenses
DSCR loans are based on the property’s ability to generate income and pay for itself. So your in-flow and out-flow numbers are a major factor in whether or not you get a DSCR loan.
The minimum requirement is that the rent covers all expenses.
The mortgage payment
Any HOA fees
Expenses not considered by your lender include:
Property management fees
If the property generates more income than expenses, you’ll get a better rate. However, if it doesn’t break even, you’ll likely end up paying a higher rate.
For example, if you show a lender your property can bring in $1,250 and your payments are only $1,000, you can get a better rate.
Know your numbers to get your DSCR loan approved. The last thing you want is a bad surprise when the lender tells you the numbers won’t work out like you thought.
How to Qualify for the Right DSCR Loan
These 3 steps are how you can qualify for a DSCR loan for investors.
Remember to focus on:
Improving your credit score
Having money for down payments and reserves
Knowing your numbers ahead of time
Leverage is king in real estate. With a little bit of effort, you can secure the financing you need to grow your real estate investment portfolio.
We want to get you the right loan for the right project. Show us a deal or ask us any questions at Info@HardMoneyMike.com.
https://hardmoneymike.com/wp-content/uploads/2022/12/Dec-22-Get-Approved-Blog-Thumbnail.png6001800Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-12-23 12:09:342022-12-23 12:11:35How to Qualify for a DSCR Loan in 3 Steps
100% leverage for BRRRRs will be back on the table soon. Here’s how to refinance a rental property into a DSCR loan.
“Can I use a DSCR loan for a BRRRR?”
A DSCR loan is one of the many products you can use to refinance your BRRRR rental property.
Using the BRRRR method, you could buy a house with a hard money loan, fix it up, then refinance with the DSCR.
Let’s go through an example of what it would look like to refinance a rental property into a DSCR loan.
What Is a BRRRR and a DSCR Loan?
To get started, let’s review what these two real estate investment terms are.
What Is a DSCR Loan?
A DSCR loan (which stands for debt coverage service ratio) is a long-term rental loan with minimal qualification requirements. Your ability to get a DSCR loan is based on the property’s debt ratio, not your income, history, or experience. As long as the rent from the property covers all its expenses (mortgage, taxes, insurance, and HOA fees), you can qualify for a DSCR loan.
DSCR loans rely on cash flow. There are some DSCR products out there designed for negative cash flow properties. But these loans have higher interest rates, lower loan-to-values, and more cash out-of-pocket.
What Is a BRRRR?
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. It’s a time-tested real estate strategy for acquiring cash-flowing rental properties.
In BRRRR, there are two loans involved:
The buy loan. The loan you use to close the house, do the rehab, and handle carry costs until you get a tenant. Real estate investors often use hard money for this, since it’s a short-term loan.
The refinance loan. The loan that gets you out of the hard money and captures the equity you put in the house with your repairs.
A DSCR loan can be a perfect fit for many BRRRRs’ second, long-term, refinance loan.
Appraised Value vs Purchase Price for a BRRRR’s DSCR Refinance
DSCR loans come in many different products (interest-only, 30-year fixed, etc.). You can use any type of DSCR loan as a refinance for a BRRRR.
There is just one question you need to ask your lender: For the LTV on a DSCR refi, do you need to use the appraised value or the purchase price?
When you do a rate-and-term refinance with a conventional loan, the guidelines often allow you to use the appraised value. For DSCR loans, however, lenders write their own guidelines. The number used for the LTV varies from lender-to-lender, so it’s always important to ask.
A Fast Refi
You don’t want to be stuck in the hard money loan for very long at all. The ideal BRRRR reaches the refinance stage within 90 days. The interest rate on hard money adds up quickly. It’s important to figure out all the details of your refinance ahead of time so you can get through the process fast.
We’ve been doing BRRRR long before it was named that. Back in the day, we called it “Quick to Buy, Quick to Refi.” The old name emphasizes a part of the process that many current BRRRR investors miss.
To be quick to refi:
Make sure you’re pre-qualified for the refinance loan, before you even close on the property.
Understand when you can use the appraised value of the house. This will tell you how much money you’d have to bring into the refinance.
Plan out whether you can get this BRRRR done with 100% leverage.
Refinance a Rental Property into a DSCR Loan with 100% Leverage
100% leverage means you don’t put any of your own money in – not for purchase, closing, rehab, or even carry costs. In 2010, we helped many clients do BRRRRs with zero money out-of-pocket. Those opportunities will be available again soon.
For a successful 100% leverage BRRRR, the property you buy has to be at least 25% undermarket. In a down market (like the one quickly approaching us now), you can find many properties for 25-40% below market value.
Example of a 100% Leverage BRRRR
What numbers do you need in order to figure out a zero down option for BRRRR? Let’s go over a couple examples.
The 75% Rule
As we’ve covered, the short-term hard money loan comes first, and the long-term refinance loan comes second. But you have to know what LTV you’re qualified for before you close on the loan.
For most cases with a rate-and-term refinance, you can qualify for an LTV of 75% of the current appraised value.
To get 100% leverage for your BRRRR, all of your costs have to stay under 75% of the after-repair value.. For example, if you had a property with a projected ARV of $400,000, a 75% LTV would leave you with a $300,000 loan (aka, 75% of $400k).
Now, the difference between the ARV and the LTV is the amount you get to budget for all your costs (purchase, closing, carry, and construction). In this case, that would be $100,000. Any costs above $100,000 end up coming out of your pocket.
Budget for Costs
Let’s continue with our previous example.
Let’s say the purchase price for this home was $250,000.
We’ve looked over the property, and we could do the full rehab for $35,000. Also, closing and carry costs will be at $15,000.
So, what does all this mean? If you can get a hard money loan for $300,000, then your whole project is covered. You can refinance the whole amount into a long-term DSCR loan and pay off the hard money, with nothing out-of-pocket for you.
No money down is the ideal for BRRRR. There will be more opportunities upcoming for zero down properties.
But for the sake of example, let’s say your costs on a property can’t stay under 75% of the ARV. If the purchase and carry costs are the same, but the rehab will actually cost $65,000, that brings our all-in costs up to $330,000.
Yet even the best hard money lenders probably won’t be able to give you more than $300,000 for this property. That extra $30k comes out of your pocket.
Are you in a position to qualify for a 75% loan? Do you know what numbers your deal needs in order to get a good refinance? Have you found a property that could be a 100% leverage BRRRR?
If you need help answering these questions, send us an email at Info@HardMoneyMike.com. Let’s run the numbers on a hard money loan. We’d love to see you refinance your BRRRR into a DSCR loan.
https://hardmoneymike.com/wp-content/uploads/2022/11/Nov-22-DSCR-BRRRR-Blog-Thumbnail.png6001800Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-11-18 14:10:422022-12-23 11:20:53How to Refinance a Rental Property Into a DSCR Loan
With a DSCR loan for a short-term rental, however, you don’t use the actual income amount you receive from Airbnb or VRBO. Instead, you’ll use the average rent in the neighborhood to qualify for your loan.
This means you can get a DSCR loan if the standard, monthly rent in the neighborhood would cover the property’s costs. So, that average rent amount must be greater than or equal to the property’s:
If the property meets those requirements, you can get an Airbnb loan without all the W2 income documentation required by typical loans.
Find the Right DSCR Loan for You
With DSCR loans, it’s very important to shop around. Every DSCR lender will offer a slightly different type of loan, with slightly different requirements.
There is a loan that is perfect for your credit, your plan, and your property. You just have to find it.
https://hardmoneymike.com/wp-content/uploads/2022/09/airbnb-loan-no-w2.png7861048Jenna Weldonhttps://hardmoneymike.com/wp-content/uploads/2019/06/hard-money-mike-logo.pngJenna Weldon2022-09-07 10:00:212022-09-05 14:18:55How to Get an Airbnb Loan Without W2 Income
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).
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?
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?
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