What is the minimum down payment for a DSCR loan?
The minimum down payment is 20% of the purchase price.
What is the maximum LTV for a refinance?
The maximum LTV for a rate and term refinance is up to 80% of the appraised value. Cash-out refinances are typically at a maximum of 75% of the appraised value. Most lenders will reduce the maximum leverage for short term rental refinances.
What is the minimum loan amount?
The minimum loan amount is going to be $75,000 though some lenders have a higher minimum loan amount of $100,000.
What is the minimum debt service needed for a DSCR loan?
Generally, you will need at least a 1.0 DSCR ratio to qualify for a DSCR loan. If your ratio is much higher than that, like 1.2+, then you might qualify for a rate reduction. If your property is under a 1.0 DSCR ratio, there are sub 1.0 or non-DSCR loan options, but they will come with a higher interest rate.
When is a loan rate and term refinance vs. a cash out refinance?
A rate and term finance is when you are paying off an existing loan on a property and aren’t taking any additional cash out. Depending on the LTV, you can sometimes use the value to help cover closing costs. A cash-out refinance is when you are pulling excess cash out to be used for other properties. If you are paying off a line of credit or a HELOC, that is considered a cash out refinance because that line of credit isn’t a lien on the property.
What is the seasoning period for DSCR loans?
If you want to use the full appraised value, six months will give you the most options to work with. Some lenders have programs, with stipulations, that allow you to refinance between 3-6 months while other lenders have a 12-month seasoning period.
Can I live in the property?
DSCR loans are considered business-purpose real estate loans, not for personal use, and require you to sign an affidavit stating that you won’t live in the property.
Can I finance a property as a first-time investor?
Of course. Depending on the lender that you work with, you might be required to have a property management company if you don’t have any prior property management experience.
Can I finance an out of state property?
Absolutely. The only additional consideration from an underwriting perspective might be how you plan on managing that property remotely.
What is the lowest credit score I need to qualify?
There are DSCR loan programs that have a minimum FICO requirement of 600 or lower. However, you will not be able to qualify for the maximum LTV and will have a significantly higher interest rate. The most favorable terms are reserved for borrowers with FICO scores of 760+
My LLC has more than one person, whose credit score should we use?
Use the person who has the highest FICO score as the primary credit applicant. They need to be at least a 50-51% owner in the LLC, depending on the program.
My credit score is very low, what should I do?
The short-term solution is to get a partner that has higher qualifying credit to meet your immediate needs. Next you need to look at a credit monitoring tool, Experian or Equifax are the best options, to see what might be bringing your credit score down. If you have a high utilization rate, then work on paying those down. If you need to get derogatory notes removed from your report, I recommend finding a local credit repair company to help you improve your FICO score.
This isn’t a bank loan, why is my credit score important?
While your debt to income (DTI) ratio isn’t taken into consideration, your credit score does play a part in the qualification process. A hard pull credit check is a standard part of the DSCR loan process to check your overall credit history. A higher or lower score will affect your loan to value and interest rate.
Will my loan show up on my credit report?
No, these are business purpose loans that are, generally, closed under an LLC. However, you will be required to sign a personal guarantee so if you default on a loan, it will show up on your credit report.
What condition does the property need to be in to qualify for long term financing?
The property needs to be considered both livable and rentable. This means that there are no structural issues, excessive deferred maintenance, or any other property condition issues that would affect your ability to place a tenant into a property. If there is an issue like described above, then you will have to get a bridge loan or some other short-term financing to fix the issue, and then refinance the property into long term financing.
Can I finance long term, mid-term, or short-term rentals?
Absolutely, there are DSCR loan programs for long term, mid-term, and short-term rentals. However, mid-term and short-term rentals are viewed as riskier, and are subject to higher interest rates with potentially slightly lower leverages (particularly for cash out refinances) than long term rentals.
What is the difference between a short-term, mid-term, and a long-term rental?
A short-term rental operates as a vacation rental, like Airbnb or VRBO, with bookings under 30 days.
Mid-term rental will have a lease in place between 30-days to nine months for renters such as traveling nurses, insurance adjusters, or professionals in town for corporate training.
Long term rentals are properties whose lease terms are typically one year with less tenant turnover.
Does it matter if my property doesn’t have a tenant?
For purchases, it isn’t uncommon for there to not be a tenant. However, not having a tenant may impact your interest rate and LTV on a refinance, depending upon which program you are using.
How do you calculate the cashflow for a short term or mid-term rental?
There are three ways that DSCR lenders will calculate the cashflow of a non-long-term rental.
i. The first is to use AirDNA or some other similar market analytics tool to see what rents are for the property in the area. This is the highest rent amount, but you might not get the full value of those projections.
ii. The second is to use the cashflow of the property, if it is currently in operation. This requires showing property management or booking website (Airbnb/VRBO/Furnished Finder) reports to show the monthly revenue.
iii. The third is to use the long-term rents from the 1007 that the appraiser will include in their on the appraisal report. This is the least advantageous to you, so ask how the cashflow will be calculated prior to underwriting.
Who needs to complete the application?
Generally, anyone that is a 50% owner in an LLC will need to complete an application but check with your lender for specific program guidelines.
Does my spouse need to complete the application?
If your spouse isn’t an owner in the LLC, then they don’t need to fill out an application. They might need to sign a spousal consent form, depending on which state you live in.
Who needs to sign the loan documents?
Everyone that fills out an application will need to be present to sign the loan docs.
What can I use to show I have down payment funds?
You will need to show that you have money in a bank account that you have legal authority to use. These can be for a business that you own, shown by using an operating agreement, or a personal bank statement. There are two ways of verifying funds: sending two months of bank statements or an instant bank verification. You can’t use a screenshot of bank statements (must be the full business bank statements with all the account information), an account balance sent via email, or the statement for a HELOC/business line of credit.
What can I use to show I have reserves?
The preferred documents for showing reserves are going to be full bank statements, not screenshots, for either your personal or business account. The second option is going to be statements from investment or retirement accounts, but there is a discount on the overall amount in these accounts.
Why can’t I use screenshots of my bank account from my phone?
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