Episode 26: Getting Started With DSCR Loans for Your Real Estate Business (ft. Derik Young)

Summary

This video features a comprehensive discussion on DSCR loans, hard money loans, rate and term type loans, and the BRRR strategy for real estate investment. Guest Derek Young from Vont, a leading DSCR lender in the U.S., sheds light on his role, the workings of DSCR loans, and the prerequisites for borrowers, including experience, credit score, and liquidity. The video covers the importance of borrower responsiveness, loan terms, interest rates, and strategies for refinancing and leveraging debt to grow investment portfolios. It concludes with insights into the operational aspects of securing loans for real estate investment, emphasizing the value of being well-prepared and proactive in the process.

Takeaways

• 💰 DSCR (Debt Service Coverage Ratio) loans are designed for real estate investors, where the rental income from the property is used to qualify for the loan, rather than the borrower's personal income.
• 🏠 DSCR loans are offered for 1-10 unit residential investment properties, not commercial properties.
• ⌚ The lender in the video was able to close a loan in just 4.5 working days, highlighting their ability to work quickly.
• 💻 DSCR loan requirements typically include owning at least one rental property or a primary residence, and a minimum credit score of 660.
• 💰 Borrowers need to show liquidity, usually 20% down payment plus reserves for closing costs and a few months of interest payments.
• 📝 DSCR loans offer 30-year terms, with options for fixed rates, interest-only periods, and varying prepayment penalties.
• 📈 Current DSCR loan rates range from high 6% to mid 8%, depending on credit score and loan-to-value ratio.
• 🔁 The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy can be employed with DSCR loans, allowing investors to recoup their initial investment and move on to the next project.
• 💳 DSCR loans are business purpose mortgages and do not impact the borrower's personal debt-to-income ratio or get reported to credit bureaus.
• 🔑 A hard credit pull is required for DSCR loans, but it is valid for 3 months, allowing for multiple loan applications within that timeframe.

Q & A

What is a DSCR (debt service coverage ratio) loan?

A DSCR loan is a loan where the lender underwrites the deal based on the property's cash flow. They look at the rental income and ensure it exceeds the monthly expenses like principal, interest, taxes, and insurance. The goal is to ensure the property cash flows from day one.

What experience is required to qualify for a DSCR loan?

To qualify for a DSCR loan, you typically need to either own one or two other rental properties or your primary home. The lender wants to ensure you have some real estate experience. For new investors, they may offer bridge loans or hard money loans instead.

What is liquidity, and how is it measured for a DSCR loan?

Liquidity refers to the cash reserves you have available. For a DSCR loan, you typically need 20% of the purchase price as a down payment, plus funds to cover closing costs and 3-6 months of interest payments. This demonstrates you have 'skin in the game' and can cover expenses until the property cash flows.

What are typical interest rates and loan terms for DSCR loans?

DSCR loans are typically 30-year loans with fixed rate or interest-only options. Rates can range from the high 6% to mid 8% range, depending on factors like credit score and leverage (loan-to-value ratio). Prepayment penalties may apply for a period of up to 5 years.

Can you explain the 'BRRRR' (Buy, Rehab, Rent, Refinance, Repeat) strategy in relation to DSCR loans?

The BRRRR strategy involves buying a property, renovating it, getting a tenant, and then refinancing into a long-term DSCR loan to recover your initial investment. This allows you to use that capital to repeat the process with another property.

How soon after purchasing a property can you do a cash-out refinance with a DSCR loan?

To do a cash-out refinance with a DSCR loan, where you pull equity out of the property, you typically need to have owned the property for at least 6 months.

Can you explain the 'rate and term' refinance option mentioned?

A 'rate and term' refinance allows you to refinance up to 100% of your total cost basis (purchase price plus renovation costs) into a new DSCR loan after just 3 months of ownership, without taking any cash out. This helps you recover your capital to redeploy into another deal.

Do DSCR loans impact your personal debt-to-income ratio or credit?

No, DSCR loans are considered business purpose mortgages and do not impact your personal debt-to-income ratio or get reported to credit bureaus. However, the lender will still check your credit score during the approval process.

How responsive do borrowers need to be during the DSCR loan underwriting process?

Borrowers need to be highly responsive during the 10-15 day underwriting process, providing requested documentation and information promptly. Lack of responsiveness can delay or jeopardize the loan closing.

What is the maximum loan-to-value (LTV) ratio for a DSCR loan?

The maximum LTV for a DSCR loan is typically 80% of the purchase price or the property's value.