Most of the time when people go apply to get a mortgage loan they have to submit extensive documentation. This documentation usually includes things like tax returns, bank statements, w2s, asset statements, in short, every except blood and stool samples. From an investor’s perspective, this can cost them the deal! With a real estate market as hot as we have seen lately, about half of all transactions are in all cash. When a seller is getting a dozen or more offers for the same piece of real estate they are faced with a tough decision. Who do they sell to? All cash offers present a guaranteed sale. Whereas if there are loan contingencies, a loan might purchase mortgage not get approved, leaving both the buyer and the seller in a tougher position. Now, many real estate investors, high net worth individuals, etc. have complex finances, and might not want to liquidate other assets in order to make an all-cash offer. When these complicated financial reports are sent to a mortgage underwriter, it is the underwriter’s job to inspect and verify everything. They may require more and more documents until time runs out and the seller chooses another offer. Enter DSCR.
DSCR – Debt Service Coverage Ratio Mortgages
This is a newer type of lower documentation loan being used
by savvy real estate investors to acquire investment properties with much lower
documentation and faster underwriting. DSCR stands for Debt Service Coverage
Ratio. Basically how it works is the underwriting is based on the ratio of
monthly market rent, or lease agreements, versus the monthly debt service on
the property, along with credit and equity information. Different lenders will
require a different DSCR ratio, different equity positions and different
limitations on credit scores, but this program offers prospective investors
(especially the self-employed) with another option to obtain financing for
their investment properties that don’t demand so much documentation.
How does pricing compare?
Due to the lower documentation required and lower
verifications, the interest rates on these types of loans may usually be higher
than a typical home loan financing option, however, in most cases you may
refinance at a later time using more traditional mortgage product guidelines.
This allows the investor to purchase a rental property with a fast loan to get
their offer accepted, and then refinance later to lower their rate when they
aren’t competing with all cash buyers for the business. This may save clients
tens of thousands on their purchase price, even after accounting for finance
fees.
How do I find out what options are available to me?
Lenders for these programs will all have their own
individual guidelines and limitations. This is why you will want to reach out
to a mortgage broker. A mortgage broker will be able to compare rates, turn times and guidelines for many different
lenders all at once to make sure you get the best deal possible.
