The homeowner loan that is taking the market by storm


Many single family real estate investors prefer to buy properties in the name of a limited liability company. This protects them from lawsuits and keeps their investment business out of their personal names. For these investors, local and regional banks have always been the best resource for refinancing loans secured by their 1-4 unit rental properties, that is until recently.

A surprising consequence of the COVID-19 pandemic has been an increase in real estate prices. Another surprising consequence has been the lower cost of borrowing for investors. As a result, a homeowner’s loan product commonly referred to as a DSCR loan (short for “debt service coverage ratio”, which is the primary underwriting factor for the product) became competitive with local bank loan pricing and takes market share from local banks in heaps.

DSCR loans were designed with the single family real estate investor in mind. Investors often buy into LLCs, which this product enables. Investors are often self-employed and their tax returns are difficult to decipher — this product does not require a tax return review. For income verification, DSCR loan underwriting focuses on the rental income (actual or potential) that the property can produce. After allowances for property taxes and insurance, the underwriter calculates a debt service coverage ratio for the property, which is a key factor in pricing the product. To determine value and rent, DSCR lenders require a full Domestic Form 1004 appraisal, as well as a comparable 1007 rent schedule for a single family. The loan product is generally full recourse for LLC members who own the property, and their FICO is also a key factor in pricing the product.

Many investors prefer the DSCR loan over local bank loan alternatives because of the competitive interest rates, simpler underwriting process, and faster relative closing times. It is typical for a DSCR lender to be able to pre-approve a borrower within hours and close a loan just days after receiving the appraisal and title work.

DSCR loans can have many features regarding loan terms, amortization, and prepayment penalties. The 30-year fully amortized DSCR loan is probably the most popular. Cash-in refinances are available, and with real estate values ​​increasing in recent years, many investors are taking the opportunity to leverage some of their equity and lock in rates at still historically low levels.

DSCR loans have been around for years, but rates weren’t very competitive before COVID, so banks reigned supreme as lenders to Main Street real estate investors. With newly competitive rates and terms designed for investors, the DSCR loan has caused a stir in the single-family investment space. And with banks struggling to “find their place” in this rapidly changing financial world, DSCR lending may be another example of the disruption that is soon becoming the “new normal.”

Dominion Financial Services is a hard money lender offering 30 Year Lease, Fix & Flip, New Construction and Multifamily Bridge loans. Founded in 2002, the Dominion Financial team lends in 49 states and has funded over $1.5 billion in loans, resulting in more than 6,200 residential projects. To learn more about Dominion Financial Services, visit our website.

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