Welcome, property investors! Are you looking to dive into the world of DSCR Loans, a crucial tool for savvy real estate investors? Whether you're just starting out or a seasoned investor, understanding Debt Service Coverage Ratio (DSCR) loans, especially for multi-family homes, is key in navigating the investment landscape.
Let's embark on this journey together and unlock the potential of DSCR loans in the realm of Multi-family real estate.
DSCR Loans are a vital tool for savvy real estate investors. Understanding Debt Service Coverage Ratio (DSCR) loans is crucial in navigating the investment landscape. This type of loan offers real estate investor the ability to buy real estate with no tax returns. Instead, we use the cashflow from the property itself to cover the monthly payments. In other words, the home pays for itself.
Multi-family homes, including 2-4 unit homes like duplexes, triplexes, and quads, as well as larger 5-8+ unit properties, offer unique opportunities for investors. They offer savvy investors the opportunity to dramatically increase their profit upside by spreading the risk amongst multiple units.
Most lenders offering DSCR programs focus on 2-4 unit homes. It's essential to understand the nuances of these investments.
Understanding the LTV dynamics is critical in DSCR loans, especially as they vary between single-unit and multi-unit properties. LTV – Most DSCR programs have a max LTV of 80% of the value of the home. But when it comes to 2-4 Unit Multi-family homes, the majority of lenders offering this program typically reduce their highest LTV by 5%. So if a lender's highest LTV for single unit homes is 80%, then you should expect them to offer a max LTV of 75% for multi-family homes.
For instance, on our own DSCR Program, the highest DSCR LTV is 85% for 1-Unit properties, but for 2-4 Unit Properties, we will do these up to a maximum 80% LTV with a 700 FICO score. Bottom line, just ask your lender.
Your credit score plays a significant role in determining your loan terms, including maximum LTV and interest rates. Credit score requirements can be a little stricter for multi-unit homes vs single-unit homes. Each lender is going to have different standards on this.
For instance, we can lend down to a 575 FICO score, but the highest LTV we would offer an applicant with that score would be 60-65% LTV.
DSCR ratios are the heartbeat of DSCR loans---after all, it's in the name! Knowing the different brackets and how they affect your new loan is crucial. The formula to calculate a DSCR ratio is:
Gross monthly Rental Income ÷ Monthly expenses (Mortgage payment, property taxes, insurance, dues, etc.)
There are three main brackets for Debt Service Ratios:
Many lenders who offer Multi-unity homes will not allow negative cashflow (DSC Ratios < 1.00). If the DSCR Ratio is below 1.00 most lenders will reduce their highest available LTV. In contrast, we will allow a negative DSCR ratio on a 2-4 Multi-family home down to 0.75, at a max LTV of 75%, as long as the applicant has a FICO score over 700 or higher.
Reserves, or the financial cushion required by lenders, can vary, particularly when dealing with multi-unit properties. On this program, some lenders have a reserve requirement. Reserves is a lending term for a cushion—in other words, it tells the lender how many months could you keep making your new payments if you had no income from your property.
This is calculated by counting the applicants available funds, and backing out the down payment and closing costs for the transaction. Then we take the remaining funds and divide by the full housing expense for the home.
Typical reserve requirements range from 0 months, up 3 months to 6 months. Getting a multi-unit home can sometimes affect your reserve requirement so ask your lender.
NOTE: If you are doing a cash-out refinance, then your cash-out proceeds can be used by your lender as funds to fulfill the reserve calculation requirement.
With multi-unit homes, many lenders, including us, allow closing in the name of your LLC, offering additional flexibility. We allow our investor clients to close in the name of their LLC. And in certain circumstances, we may not report the new loan to your personal credit.
When you move into the realm of 5-8+ unit properties, you enter a different category of investment, with its own set of rules. Then the rules are a little different.
Most lenders do not offer DSCR loans on 5-8+ unit properties, but we do offer them!
The highest LTV is still 80%, but lowest Debt Service Ratio is 1.00 for 5-8+ unit properties. The biggest consideration here is that the rules for calculating the DSC Ratio can be a bit involved than a standard DSCR loan.
For instance, we would still look at the usual expenses like PITIA, but we would also need to see all of the fixed utilities and other expenses that are tied to the property. For these programs, we need to look at the property as it’s own one-time transaction, so we’d need to know about along with your resume as an investor because your experience plays a part in the approval process.
In a sense, financing a 5-8+ unit property is more similar to a traditional commercial loan than a residential loan, but it's still significantly easier. If you’re interested in a 5-8 Unit property, we recommend that you call us, or you can also use our 5-8+ Unit DSCR Quote form.
Larger unit properties (especially beyond 8 units) have more complex DSCR calculations and often require a more comprehensive evaluation of the investor's credentials, resume, etc.
Utilize our free tools like our own DSCR CALCULATOR to run your own loan scenarios for potential investments.
We hope this guide has illuminated the path to successful real estate investment using DSCR loans. We lend in 29 states, we have a robust array of DSCR loan programs to meet almost any need, and we have a ton of experience originating DSCR loans!
We're here to support your journey! Simply give us a call so we run some numbers for you and answer all your questions!
You can also drop us a line HERE »
Yours in successful homeownership,
Unconventional Lending Program Director
Derek Bissen is a licensed Mortgage Loan Originator with over 25 years of experience in the industry. Derek is a self-employed lending expert who is known for his ability to work with borrowers who have substantial wealth and non-traditional lending needs. He is a creative loan structurer and specializes in portfolio lending, asset-based lending, bank statement lending, as well as traditional loans such as Conventional, FHA, VA, and first-time homebuyers.
Derek's expertise in the mortgage industry is unparalleled. He is a trusted advisor to his clients, providing them with customized loan solutions that meet their unique financial goals and needs. His vast experience and knowledge make him a valuable asset to anyone looking to purchase a home or refinance their existing mortgage.
As a highly-experienced loan originator and author, Derek is committed to sharing his knowledge with others. He regularly provides valuable insights and advice to readers looking to navigate the complex world of mortgage lending. His articles are informative, engaging, and backed by years of hands-on experience.
With his wealth of knowledge and dedication to his clients, he is the go-to source for all your mortgage lending needs. If you're looking for a reliable and trustworthy mortgage expert, contact Derek today to learn more about how he can help you achieve your financial goals.