Expert Insights: Discover the Benefits of DSCR Loans
This piece originally appeared in the May 2022 edition of MReport magazine, online now.
Raymond Eshaghian is president and founder of Greenbox Loans Inc., a wholesale lender specializing in non-QM/nonprime loans. Eshaghian has over 30 years of mortgage lending experience in senior and managerial roles, with extensive experience and expertise in the non-QM market. MReport recently had a conversation with Eshaghian about the benefits of debt service coverage ratio (DSCR) loans, their growing popularity, and how they differ from standard non-QM products.
What are DSCR loans and what makes them a good option for first-time buyers?
Debt service coverage rate loans, more commonly known as “DSCR” loans, allow a borrower to finance real estate without having to personally qualify with their own income. The property is qualified instead, using its rental rate divided by the debt associated with it, such as loan payment, taxes, insurance, and HOA fees, if any. This number is the ratio. A ratio of one or more indicates that the borrower will earn enough from the property to repay the loan.
The advantage of DSCR financing is that you also don’t have to be a millionaire to use these products and start building real estate wealth. Investors can also deduct the depreciation of assets from their taxes and benefit from tax credits for the purchase of social housing. Overall, DSCR loans are a great financing vehicle for both experienced and new investors.
What is driving the growing popularity of DSCR loans?
There are several factors, really. Most obvious is the growth in real estate values and rents, which have made real estate investing more attractive to new investors. In fact, Realtor.com recently conducted a rental analysis for properties with two bedrooms or less in the 50 largest metropolitan areas in the United States and found that the median rent jumped 19.3% between December 2020 and December 2021. Another reason is that DSCR loans offer long-term loans. term financing on reasonable terms, making it a great option for private money or “hard money” lending.
Aren’t DSCR loans typically used for commercial properties?
Traditionally, this has been true. But today, they’re used for nearly every type of property, including mixed-use buildings and condos. In fact, right now we’re doing an incredible number of DSCR loans for unsecured condominiums. The formula used to calculate the ratio for residential properties with one to four units is similar to the formula for commercial properties, but much simpler.
Still, these are non-QM loans and there are key differences between them and the average 30-year fixed loan. If you plan to sell DSCR loans, it helps to have a partner who specializes in this.
Why would investors choose these loans over hard money loans?
DSCR loan programs are traditional mortgages with 30-year funding, whereas hard money loans typically only last one to two years. This means that with hard money the borrower has to refinance repeatedly and pay high points and fees if they decide to keep the property. Borrowers with high credit scores can also get a DSCR loan for as little as 20% down. Many Americans have enough equity in their homes to put down a down payment on a rental property. Moreover, by accepting a slightly higher rate, investors can even obtain “ratio-free” DSCR loans for properties with a slightly negative cash flow.
Generally speaking, how well do mortgage brokers and loan originators understand these products?
As DSCR loans become increasingly popular for residential investments, most originators have a basic understanding of how they work.
In particular, mortgage brokers are paying more attention to these alternative non-QM programs to provide more options for their clients. That being said, there are still misconceptions out there. The most common myth is that a borrower qualifies for a DSCR loan the same way they qualify for a regular mortgage. The truth is that it is the property that qualifies, not the borrower. Yes, a borrower needs good credit. But there is no income or employment verification that takes place, and no TRID requirements. It is the income from the property that counts.
What is your outlook for DSCR loans through 2022 and beyond?
Right now, the demand for DSCR loans is only going up.
Given the nation’s housing shortage, home values and rents are expected to continue to rise for the foreseeable future. More and more people prefer to invest in real estate rather than stocks and are happy to build a long-term real estate portfolio.
DSCR loans are simply one of the easiest and most versatile ways for ordinary Americans to start investing. They are also a fantastic way for mortgage brokers and originators to tap into the real estate investor market and grow their business.