DSCR loans are an excellent option for investors who want to buy commercial real estate. This unique mortgage product does not require any personal income verification or investigation into your debts. Because it relies on the property’s income rather than your own. In this article, we will discuss how to apply for a DSCR loan
DSCR stands for Debt Service Coverage Ratio, which is the building’s rent divided by its debts. You want to have a ratio of at least 1.25, as this means that the property is making 1.25 times what it requires to pay its debts.
The process of applying for a DSCR loan is quite simple and streamlined. In this article, we’ll explore the steps necessary to secure one of these loans and generate passive income from real estate.
Table of Contents
Choose a Market
First, you need to find exactly where you will purchase a property. Look at real estate laws, market prospects, and economic outlooks for different areas of the country; This will help you hone in on an area that is promising but not yet overpriced.
Select a Property
Once you’ve identified what general area you’d like to buy in, look at commercial real estate listings. You will want to look at its overall condition to see what repairs you need, then identify its market rent. This tells you how much you can reasonably expect to make from the property each month.
The purchase price will help you predict how much your mortgage will be, and you can divide the potential income by the potential mortgage to see if it’s a good deal.
Find a Good Lender
Getting a good lender is a significant component of purchasing a property with a DSCR loan, as you want to choose one with great experience and reasonable interest rates. Not all lenders work in every area.
So take a look at what is locally available; For example, in New England, VisioLending provides a DSCR loan in Maryland that investors will appreciate.
Fill Out Your Application
Every DSCR lender will require you to fill out an application, but don’t worry: it’s much less involved than one for a conventional loan. You need to provide your full legal name, address, and identity verification, as well as permit them to inquire about your credit score with the major credit bureaus. You do not need to provide tax returns, pay stubs, or any disclosure of your other loans and debts.
Gather Rent Documentation
To calculate the Debt Service Coverage Ratio mentioned above, the lender must know how much the property will generate each month. This is done by submitting evidence of how much previous tenants have paid through lease agreements and invoices.
You may also need to provide a rent schedule, which assesses the fair market rent in the area; This will be done by an appraiser, just like the property appraisal will be.
Get an Appraisal
In addition to identifying how much you can expect to make from the property, you also need to prove to the lender that the property is worth the purchase price. This is done by an appraisal, which will be completed by a licensed appraiser.
They investigate the condition of the property and overall values in the area, which will be given to your lender. Some lenders may request that you have two appraisals done to ensure it is worth the cost.
Wait for Approval
After completing this, you will get an approval or denial from the lender. This usually doesn’t take anywhere near as long as it would for a conventional loan. Because they are primarily calculating the potential profit from the property rather than identifying your creditworthiness.
You may only need to wait a week or two to be approved. This tells you how much money you will be approved for, but it does not mean the deal has been fully completed.
Perform a Property Inspection
Before you sign a contract, you want to be sure that there are not any undisclosed issues with the property. This is the same for any real estate deal. As such, you should have a licensed property inspector come and give the place a thorough look. Which can help you negotiate the purchase price with the seller if there is something that must be fixed right away.
Pay the Down Payment and Closing Costs
If you’re satisfied with everything, it’s time to sign the contract. At which point the lender will release the money and the deal will be complete. At this time, you will need to pay a down payment and closing costs as you would with any other real estate transaction.
Because DSCR loans are a bit higher risk than other types of mortgages. So they expect to pay at least 20% down, though some lenders may want 25%. You will also need to provide closing costs, which cover the expenses of signing the contract.
A DSCR loan is a relatively straightforward process with far fewer steps than a conventional loan. Which makes it perfect for real estate investors who want to get started right away.
The primary concern is checking that the property is profitable rather than looking into your personal finances. Which means less paperwork and faster approval.