A DSCR loan for investment properties is often a good way to reach qualification. This article will describe 8 situations where you might want to use this form of financing.
Investment property can be one of the most reliable and profitable assets you own. But purchasing a property is expensive, and even the most successful, well-funded investors need loans for these purchases.
Financing can be tough, but a DSCR loan can help. Standing for “Debt-Service Coverage Ratio,” these loans rely on the amount of income the property will generate compared to the monthly costs of ownership. Allowing you to bypass many of the traditional qualification requirements, these loans are useful in many different situations.
For more details on a DSCR loan, see our article titled “Qualify for Your Next Investment Purchase with a DSCR Loan.”
8 Scenarios When a DSCR is the Right Choice for Your Investment Purchase
1. You Don’t Have Traditional Income Documents
Most of the best candidates for these loans are people who don’t have traditional income documents that are used on the majority of property loans, investment or otherwise. Traditionally, borrowers bring paystubs, tax returns, and income information from their employer to qualify for an investment loan.
But if you are a full-time investor, a retiree, or a self-employed professional, there’s a strong chance that you don’t have these documents. This means you need an alternative mortgage. Using the DSCR instead of typical income documents could help you qualify.
2. Your Income is Not Enough for a Typical Investment Loan
Investment loans have high qualification standards. In most cases, you need a strong credit score, a hefty downpayment, and a significant income. If you have attempted to purchase an investment property and been turned down because of your income, a DSCR loan could result in approval.
This is because the loan does not rely on your income (at least not entirely) for mortgage approval. Instead, you are approved based on how much money the property will bring compared to its overall cost of ownership.
3. Your Debt Load is Too High
This is another situation where traditional qualification may not be enough. Your debt load, or “debt-to-income ratio” is one of the most important factors when qualifying for a loan. It takes into account the amount you owe every month in debt payments and compares it to the amount you earn on a monthly basis. (It does not account for your total debt load, just the monthly amount.)
For investment properties, debt loads that would be allowed for a home purchase may disqualify you from financing. A DSCR loan, on the other hand, can circumvent a high debt load and (possibly) help you qualify when other options are not available.
4. You Need a Fast Close on an Investment Purchase
When investing, speed matters. If you come across a purchase that is a sure-fire money maker, a property that is a great deal and could bring in high earnings, you can be certain that other investors have seen it as well. A fast purchase is often essential, so you need to be ready.
With a DSCR loan for investments, you can move quickly. You won’t have to go through the extensive income and debt verification, and the process can be faster than many other loan applications.
If you are placing the property in an LLC, using a DSCR loan may help with qualification.
5. You Want to Purchase Under an LLC
If you own an investment, you likely understand the benefits of purchasing and owning properties under an LLC. Essentially, with an LLC (Limited Liability Company), your personal finances, debts, and properties are legally separate from those of your business.
Your business (not you directly), can own a property, which means you are shielded (although not immune) to the financial risks. For example, if a tenant hurts themselves on one of the properties, they can sue the company but not you personally. (Or, at least, they will have a harder time suing you personally.)
With DSCR loans, you can make the purchase and own the property under an LLC, which is not a option for some of the alternatives.
6. You Already Have Numerous Mortgaged Investment Properties
Lenders are hesitant to offer loans to individuals who have numerous properties with mortgages. While using loans can certainly build your overall investment profile, there are clear risks if one investor has too many financed properties. For this reason, traditional investment-property loans are often restricted for investors with 5, 10, or 15 properties.
If you have numerous properties with mortgages, you could meet a few roadblocks when you look for another loan. A DSCR loan, however, could provide a breakthrough, as they may allow for more properties than other loan programs. Exactly how many properties you can have will depend on the lender and other factors, but it could be a useful option when you want to expand an already large portfolio of properties.
7. You Want to Purchase a Unique Property
With a DSCR loan, you can purchase a wide variety of properties for many different purposes. If needed, you can buy a property that will act as a short-term rental or long-term rental. As long as you can demonstrate that it will generate income, you should be able to qualify under these circumstances.
You can also buy a variety of properties, including commercial investment property. This creates a new opportunity to diversify and improve your collection.
8. You Don’t Have Massive Reserves
Cash reserves are simply accounts held by borrowers that act like a financial safety net. Lenders often require cash reserves, especially for higher-risk loans like investment mortgages. The total amount you need will vary, and some lenders will require a full year of payments (or more) in your account before they approve the loan.
With a DSCR loan, you may be able to reach approval without a large amount in savings. This can create easier access to financing when you need it.
Work with an Expert Team for Your DSCR Loan
If you want to apply for a DSCR loan, or if you want more information on these useful mortgage options, give us a call today. Whether you are a seasoned investor or a recent retiree who wants to diversify your portfolio, we are here to help.
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