The Appeal of DSCR Financing to Real Estate Investors

Written By: Matt Hamilton

An easy way to explain a Debt-Service Coverage Ratio (DSCR) to clients who invest in real estate is that the projected rental income will be used to qualify for the loan to purchase a property or complete a refinance. Next you’ll want to explain some advantages of DSCR financing.

The Benefits of an LLC

One risk-aversion aspect of investor cash flow loans is taking title as an LLC. Using a limited liability company to purchase investment properties puts a wall between one’s personal assets and their business finances. There can also be tax benefits with LLCs, which allow investors to take advantage of pass-through taxation (talk to your tax preparer for information on your scenario). And then there’s privacy to think of; if a deed is in the name of an LLC, tenants won’t have the owner’s personal information, leaving a property manager as a go-between.

No Tax Returns Required

As personal income isn’t considered in the approval process, personal tax returns and even employment histories aren’t relevant with DSCR. So no gathering pay stubs and explaining gaps in your work record — a big plus for people who are self-employed.

Fewer Restrictions Than Conforming Loans

Clients who are considering conforming loan products for their real estate investments could use some reminding about the strings Fannie Mae and Freddie Mac and others often attach to real estate loans. These can include limits on the types and the numbers of properties one can buy. Restrictions that are limited with NON-QM products.

A Solid Way to Build a Real Estate Portfolio

If a client’s first property is profitable, why not suggest they expand by using cash-out refinancing on the first property to buy a second? This tactic could be used multiple times to create an ever-growing real estate portfolio.

Quicker Closing Times

With other types of mortgage loans, there’s more underwriting work, such as verifying income and checking employment history. But not so with NON-QM cash flow financing. That often means that the time from application to closing can be considerably shorter. 

Low Initial Costs

Buying an investment property can take less cash than many of your clients may think; you don’t have to be a millionaire to make a million-dollar-investment. If a prospective buyer has got the money for a 20% down payment, they may qualify for an investor cash flow loan.

There’s a strong possibility you have clients who are ready to become real estate investors — but they just don’t know it yet. Share the benefits of DSCR financing and they may be property hunting soon!