DSCR loans are a powerful tool that allow investors to fund rental property deals without having to rely on traditional financing channels. It’s crucial to understand that not every DSCR lender operates the same way, however, and these differences can have a major impact on how easy it is to qualify for financing or how effective the financing may be. The brokers who understand these key differences can compare different loan programs more easily and recommend the right financing to their clients.
Are you a broker who’s active in the rental real estate space, or a lending partner that’s looking to add DSCR programs to your loan offerings? Here are the 10 most important DSCR criteria to compare when evaluating lenders.
First and foremost is the DSCR minimum on loan programs. These can vary from lender to lender, with stronger borrowers able to secure more favorable terms, but they typically fall in the 1.00 – 1.10 range. With a minimum above 1.00, it means that the property’s income can comfortably cover its monthly expenses. That creates a good balance of low risk on the part of the lender & borrower while still ensuring that a wide range of properties qualify for financing.
Next is the maximum loan-to-value available on programs. Again, the borrower’s experience can affect this number, and lenders may also have different underwriting tiers based on the borrower’s credit score. High LTV can be a great advantage in competitive markets, but you should also be aware of how higher loan amounts can affect monthly payments and even potentially bring DSCR below the program’s minimum requirement.
Although underwriting with private loans is typically more focused on the property rather than the borrower, lenders still want to ensure that borrowers will reliably make payments. There is often a baseline credit score minimum on programs, with more favorable terms available the higher the borrower’s credit is above this minimum. Partnering with lenders that have lower baseline requirements can help you expand your pool of potential clients and enable you to close more deals.
Lenders want to see that a borrower will still have sufficient liquidity after a deal is funded, in the case of a property-related emergency. The number ranges from 3-9 months of monthly payments (PITIA), but experienced borrowers may have lower requirements when compared to first-time investors. Before applying for financing, ensure that your clients will have ~6 months of reserves available after closing to keep the underwriting process smooth.
DSCR lenders have a different approach when it comes to how they handle rental income for a property. While traditional lenders tend to use 75% of the gross rent in underwriting (to account for vacancies/repairs), private lenders are able to use 100% of monthly rent. This allows more properties and borrowers to qualify for financing, but it’s also why these lenders want to see sufficient borrower reserves. For newly developed or vacant rental units, private lenders may use the market rate during underwriting. If a property has tenants in place, borrowers should provide the lender with the most recent rent rolls, especially if monthly rent is above the market rate.
Not all lenders will have financing available for all property types. Certain lenders may only fund certain property types, such as single-family, multifamily (2-4 unit), or larger (5+ unit) apartment buildings. By working with lenders that offer broad property eligibility, you may be able to capture more business and close higher-value deals.
RCN Capital provides DSCR financing for both single and multifamily properties. Funding for larger multifamily properties is offered through our dedicated Structured Finance Group, which also has bridge and portfolio financing options available for experienced investors.
There may also be certain entity requirements for borrowers working with private lenders. Generally, they will require that investors use separate, established LLCs rather than lending to individual borrowers. This can actually be a benefit for the borrower, since it allows them to separate their investment liabilities from their personal assets. It does mean that borrowers will also need to submit proper entity documents with their application, however. Be sure to check the entity and documentation requirements for each lender you are planning to work with, since they can vary.
Lenders may have different terms for their DSCR programs depending on certain criteria. For instance, borrowers may be able to secure higher LTV ratios with a higher credit rating, and multifamily programs may have lower LTV caps than single family loans. For each client, brokers will need to compare rate and fee structures across multiple lenders in order to secure the best possible pricing & terms.
Learning about each lender’s specific approach to property valuation can help you complete the process faster and get deals funded sooner. They may require a certain type of appraisal, or that you choose from the list of one of their approved AMCs (appraisal-management companies). Certain property types may not require a full appraisal, and the lender can accept an alternative valuation option. Be sure to ask questions about your lender’s valuation process, since this can help expedite the loan approval.
It’s important that you get familiar with the underwriting process of the lenders you’re planning to work with. If you want to ensure a smooth and fast process, work with lenders that have experience in the space, and who prioritize consistency and regular communication. Also choose lenders that have a reputation for providing brokers with dedicated support. These traits help you quickly deal with any issues that might come up in the financing process, and ultimately deliver a better experience to your clients.
Taking time to compare the specifics of different DSCR programs is key to closing more business as a real estate broker. A better lender match directly results in smoother deals and a better client experience. It allows you to position financing to clients more effectively, and means less last-minute surprises or delays that affect the funding process. It also helps you build stronger partnerships with clients which drives repeat business and long-term growth for your brokerage.
If you want to maximize the returns on your clients’ investments, partner with a lender that can provide you with the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors and lending partners. If you are looking to offer DSCR financing to your clients, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.