If you're a real estate investor looking for financing, you've probably come across the terms DSCR and conventional loans. DSCR (Debt Service Coverage Ratio) loans are becoming increasingly popular among investors, but many are still skeptical about their benefits over conventional loans. In this blog post, we'll explore the advantages of DSCR loans and why they may be the better option for you.
Understanding DSCR Loans
Before we dive into the benefits, it's important to understand what DSCR loans are. Unlike conventional loans that rely on personal income and credit score, DSCR loans are based on the property's ability to generate income. This means that the lender analyzes the property's cash flow and determines the amount of financing you qualify for based on the debt service coverage ratio (DSCR).
Benefits of DSCR Loans
Not Based on Personal Income
One of the biggest benefits of DSCR loans is that they're not based on personal income. This means that you don't have to worry about showing your tax returns or W-2 income. Instead, the lender will analyze the property's cash flow to determine if it can generate enough income to cover the loan payments.
Can Be Made to Business Entities
Another advantage of DSCR loans is that they can be made to your business entity, such as an LLC, corporation, limited partnership, or general partnership. This means that the loan won't show up on your personal credit report, which can be a huge benefit if you have multiple mortgages.
Projection-Based
DSCR loans are also projection-based, which means that the lender will do a rental survey to determine the property's income potential. They'll then use this income to qualify you for the loan from a debt service coverage standpoint. This is particularly useful if you're purchasing a non-owner occupied property and don't have a signed lease.
Fewer Mortgages to Pay
Finally, DSCR loans allow you to bundle multiple properties under one loan, which means you'll have fewer mortgages to pay. This can be a huge benefit for investors with multiple properties, as it simplifies their finances and makes it easier to manage their investments.
Conclusion
While conventional loans may offer better rates, DSCR loans provide a range of benefits that can make them a better option for real estate investors. Not only are they not based on personal income, but they can also be made to business entities, are projection-based, and allow you to bundle multiple properties under one loan. So, if you're a real estate investor looking for financing, it's worth considering a DSCR loan as a viable option.