Eric, a self-employed real estate investor, came to MBANC in search of creative financing solutions for a luxury property in Florida. The property’s location, amenities, and design made it an ideal premier short-term rental. However, obtaining financing with traditional lenders required time, proof of income, and a lot of paperwork.
Using MBANC’s DSCR loan program and expert loan processing, Eric qualified using projected short-term rental income of his property and was able to secure the property within a matter of weeks.
Eric’s story is not unique. Real estate investing can be a great way to build wealth and generate passive income, and with the rise of Airbnb, short-term rental investment is an opportunity many are willing to explore. However, it can also be a time-intensive endeavor, and from our experience, trying to qualify for a conventional mortgage can be a frustrating experience for the investors with unconventional income structures. This is where creative financing options come in.
Creative financing options are non-traditional ways to finance real estate investments. One of the most popular creative financing options is the DSCR loan. DSCR stands for debt service coverage ratio, and DSCR loans are based on the cash flow of the property rather than the borrower’s income.
What Is a DSCR Loan?
DSCR loans are designed for real estate investors who want to qualify based on the cash flow generated by their investment property rather than traditional tax returns, paystubs, and W2s. DSCR loans are also a great option for real estate investors who have an investment property portfolio and have reached a traditional credit limit.
When a real estate investor applies for a new loan or refinances an existing mortgage, lenders evaluate the debt service coverage ratio as one indicator to calculate the maximum loan amount.
The debt service coverage ratio (DSCR) is a measure of a property’s net operating income against its debt obligations. It is a calculation that shows how well a property’s annual net operating income covers its annual mortgage debt obligation. For a rental property, such as Airbnb, the estimated market rent is used for the operating income projection.
If you know the income the property will generate, you can divide that by the property’s total expenses. For example, if your property brings in $18,000 a year and costs you $12,000 in mortgage, taxes, insurance, and HOA fees, the DSCR ratio would equal $18,000 / $12,000 = 1.5. Lenders generally prefer a ratio of 1 (breaking even) or above.
What Are the Benefits of a DSCR Loan?
DSCR loans can be used to finance the purchase of a property as well as refinance an existing investment property loan.
DSCR loans require the least amount of paperwork of any mortgages. You need to demonstrate that you have the assets for closing costs and reserves, have a workable credit score, and locate a profitable property—that’s it.
DSCR loans are easier to qualify for than conventional mortgages. DSCR loans use the rental income from a property, rather than the borrower’s personal income to qualify. This is why DSCR loan programs are considered non-conforming, as they don’t fall under the same qualification criteria as Freddie Mac and Fannie Mae loans or any other government agency. This makes them a good option for investors who may not have a traditional income profile.
DSCR loans are the fastest program to close and are ideal for real estate investors who require immediate access to capital. And whereas there is a limit to how many rental properties a borrower can buy with conventional mortgages, they can generally take out as many DSCR loans as they need.
What Are the Terms of a DSCR Loan?
DSCR loans can be a great way for real estate investors to finance their investments. Consider working with an experienced lender specializing in DSCR loans, such as MBANC. We are the premier direct lender and the bank which means we can offer more flexible terms, qualification criteria, and application process.
These are the highlights of the MBANC’s DSCR mortgage program:
- Investment properties only.
- Short-term rentals, such as Airbnb or VRBO, are eligible.
- Single family homes, condos, condotels, 2-4-unit and 5-8-unit properties are eligible.
- Qualify using subject property rental income or proposed rental income. No tax returns, W-2’s, or pay-stubs required.
- The initial 10-year interest-only period for terms of 30 and 40 years.
- Purchases up to $3.5 Million. Cash out refinances up to $3 Million.
- Max LTV up to 80% (minimum 20% downpayment).
How to Qualify for a DSCR Loan?
At MBANC, to qualify for a DSCR loan, you don’t need to provide proof of income, source of income or employment such as tax returns, W-2s, or pay stubs. All you need is:
- A minimum downpayment of 20%.
- A minimum credit score of 660.
- Proof of subject property rental income or proposed income from an appraisal.
- Assets to cover at least 6 months of reserves.
- To have owned a property within the last 3 years.
How to Apply for a DSCR Loan
Contact us today online or over the phone to apply for your DSCR loan and start your real estate investment journey. Our experienced mortgage experts will support you throughout the straightforward 3-step application process:
- Application. Your MBANC mortgage officer will outline every aspect of the loan, including its value, term, fees, etc. We will ask you to fill in the 1003 Universal Loan Application, which can be completed over the phone with your MBANC mortgage officer.
- Appraisal and processing. Your MBANC mortgage officer will ask you to complete the standard loan paperwork. We will only ask for details about your financial fitness and rental property, not your past income or tax returns. An appraisal will be ordered for the property, and an appraiser will estimate its value and rental income.
- Underwriting and closing. Once your file is complete and the appraisal is returned, your file will be underwritten in-house by our industry-leading expert underwriters. Closing is standard and the quickest part of the process.
We have been a premier consumer direct lender since 2005. Our founders are leaders with over 100 years of experience combined and closed deals in the billions of dollars in total. Our proprietary process delivers proven results.
Getting a mortgage with MBANC is different compared to other lenders. At the outset, you are working with a knowledgeable, understanding, qualified loan agent to find the best solutions for your mortgage needs.
We let you know upfront exactly what paperwork we need so you don’t waste your precious time. An average funded loan with us takes on average just 21 days. We are completely transparent regarding the terms of your loan and vested at every touch point of the loan process. We let you know upfront exactly what paperwork we need so you don’t waste your precious time. An average funded loan with us takes on average just 21 days. We are completely
Is real estate investment using a DSCR loan worth it at the moment?
Yes. Despite the high interest rates, there are still deals out there and profits to be made. Plus, you benefit from MBANC’s 10-year interest only period which allows you to make interest payments only in the first 10 years until the interest rates fall and you can refinance at lower rates.
Can I apply if the DSCR ratio for my property is below 1.00?
Yes, we are able to finance your loan. MBANC is the premier direct lender and the bank and we are often more flexible than traditional lenders. We can use other factors such as your credit score, and reserve assets to get your loan approved. However, as the loan is higher risk for us, this may impact the interest rate on your loan and LTV may be lower.
I am a foreign investor, am I eligible for a DSCR loan?
Yes. Whereas foreign nationals can qualify for DSCR loans with MBANC without having to provide income documentation, there are a number of limitations. The maximum LTV ratio is 70%. This means that you will need a down payment of 30%. And, compared to standard investment property loans, a DSCR loan will likely have higher interest rate and fees.