Let's dive into the differences between DSCR investment property loans and conventional home loans, while also acknowledging their fundamental similarities. Both require an application process, appraisal, and credit scores.
While conventional loans may heavily weigh personal income, assets, and employment history, DSCR investment property lenders are more concerned with your investment experience and strategy.
Here are some key differences to note:
Lower Maximum LTVs: Down payments for investment property loans are typically higher, averaging around 20-25% (though this can vary based on credit score), compared to the 3% often required for government-sponsored consumer mortgages.
Higher Interest Rates: Expect higher interest rates and fees on investment property loans, typically ranging from 100 to 400 basis points higher than traditional mortgages. For instance, if a conventional mortgage stands at 6.5%, an investment property loan for the same property to the same borrower would be at 7.5%.
Higher Reserve Requirements: We often need proof of liquid cash reserves equivalent to the down payment, closing costs, plus 6-12 months of monthly expenses, including principal, interest, taxes, insurance, and association dues. Conventional mortgages, on the other hand, may require fewer reserves, ranging from 0 to 6 months.
Less Documentation: Conventional loans are interested in employment history and personal income, requiring pay stubs and tax returns. Investment property loans, especially if you own multiple properties, demand less documentation. Most of our programs focus primarily on property cash flow and experience, simplifying documentation requirements.
Understanding these differences can guide your decision-making process when selecting the appropriate financing option for your investments property property investment endeavors.
Benefits of a DSCR Loan: DSCR loans are designed for individual real estate investors or investment companies.
Pros of a DSCR Loan: Using a DSCR loan comes with several benefits, such as:
No income verification required
No job history required
Closing times tend to be quicker than conventional loans
Access loan amounts up to $5 million
Unlimited cash out
Interest-only options available
DSCR loans can be used for short- and long-term rentals
Close DSCR loans in the name of your LLC
Borrowers find DSCR loans advantageous as these loans allow them to buy a rental property when they previously could not secure conventional financing. The DSCR loan is also hassle-free and has no income verification requirements, which means no W-2s, pay stubs, or tax returns are required for approval. An added benefit is that DSCR loans have no limit on the number of properties an investor may choose to finance. Essentially, this opens an opportunity for certain investors to expand their portfolios.
Cons of a DSCR Loan:
Because the DSCR loan is designed to lend outside traditional lending scenarios, investors will find that the minimum down payment requirements for DSCR loans often exceed the down payment required by conventional mortgages. Additionally, borrowers may find that there tend to be higher interest rates, more fees, and more closing costs associated with DSCR loans vs conventional loans.