There is growing demand for investment-focused financing in today’s real estate environment. That’s because unlike traditional mortgages, these loans allow investors to secure properties faster and more reliably than the competition. However, banks and other conventional lenders don’t offer investor-friendly loan programs. Instead, real estate investors tend to use DSCR (Debt-Service Coverage Ratio) loans offered by private lenders, since they have a more streamlined, asset-based underwriting process.
Brokers and lending partners can also benefit from adding DSCR loans to their product offerings, since they help you better serve rental property investors and get more deals closed. Read on as we cover the basics of these programs and how they benefit real estate investors and loan partners.
The basic definition of a non-owner-occupied loan is one where the borrower & related persons cannot live or use the real estate property being financed. The main purpose for these loans is for financing investment purchases. Loan applications are evaluated slightly differently from traditional mortgages, and more types of properties qualify including multifamilies and short-term rentals. They’re also designed for long-term scaling, so they can investors grow their portfolios faster.
DSCR stands for debt-service coverage ratio, and it measures a property’s ability to cover its debt expenses through earned income. The formula for DSCR is Net Operating Income (NOI) / Total Debt Service and it is typically calculated monthly rather than yearly. Rental income is often more important than personal income when qualifying for private loans. Lenders may still want to verify experience and credit to determine loan terms, but qualification is primarily based on this figure.
DSCR loans are great for investors since these programs don’t suffer from the same property caps and underwriting limitations as traditional mortgages. They also make it easier for borrowers will less-than-perfect credit or non-W2 income to still qualify for financing.
Real estate investors use DSCR loans to purchase rental properties without having to deal with the stringent underwriting process of a bank loan. It helps investors scale their portfolios faster, especially when they’re looking to quickly gain exposure to a market or reposition their investment strategy. These loans aren’t just limited to single-family homes though. They’re commonly used to acquire multifamily homes as well, and their easier to qualify for since the rental income is strong on most multifamily investments.
Investors typically use DSCR loans to get away from the stringent underwriting process of conventional banks. For brokers and lending partners, they allow you to fund deals faster and more reliably, even when your borrower might struggle to secure financing elsewhere. Investors who receive most of their income from rental properties might not have met the income requirements for a traditional mortgage, but they can still qualify for DSCR financing. They can also be used by investors to quickly acquire multiple properties and scale a real estate portfolio faster than when using standard loan programs. And unlike FHA programs, DSCR loans don’t have the same limitation on the number of properties that can be financed at once.
DSCR loans typically come in a standard 30-year term, with either fixed-rate or adjustable-rate options depending on your lending partner. They can be utilized for both purchase or refinance purposes, and LTV typically caps out at 80%. That also means the borrower is expected to bring at least a 20% down payment to the table. The private lenders who offer these programs base loan terms on borrower experience, so having proof of prior rental ownership can help your clients secure better terms. Most lenders also have a minimum DSCR threshold, which usually ranges from 1.00 to 1.10.
There’s a good chance you already have clients that can benefit from DSCR financing in their portfolios. If you have clients who are struggling to secure rental financing because of their credit or income situation, be sure to bring DSCR programs up as a solution. Investors who are looking to rapidly scale their portfolios are also ideal candidates. These programs offer faster approvals, greater flexibility, and improved scaling potential; focusing on these benefits is a fantastic way to start the conversation with clients.
The most common objections to using DSCR programs include:
Being able to answer their questions professionally can reassure your clients that DSCR programs are perfectly safe, and this also strengthens your position as an expert in the space which helps you secure future business.
If you want to provide your clients with a stellar lending experience, partner with a lender that has a proven track record in the real estate investing space. RCN Capital lends to real estate professionals, commercial contractors, developers, and 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.