The EASIEST Financing Option for Short Term Rental Investors: DSCR Loans

0:00So DSCR stands for debt service coverage ratio and really simplified. All it really is is rents divided by payments, right? So it used to play into I think it back in the in in it kind of came from maybe the commercial side from what I understand. But then it's kind of developed into this new loan product for investors. Which it has some advantages you know for for investors as well as far as you know not touching your doesn't go on your debt to income. It doesn't we don't port these to credit. So, it's got some advantages there. But DSCR, so rent divided by payment.

0:34we, again, these are not assetbased loans, right? So, or let me back that up. They're not income based loans, right? So, they're asset based, which means, yeah, we don't look at tax returns, W2s, income statements, anything like that on the borrower. All we really need on the borrower is a a credit score, which we'll probably go over here in a little bit. And, and then we focus everything else on the asset itself. So DSCR, so rents divided by payments, rent would be if rents cover the payment exactly on the loan, that's one DSCR. So it's break even.

1:05Anything above one DSCR means it's cash flow positive, right? So most investors are going to want it to be, you know, one and a quarter higher. I'm not sure what you teach to your your students or your your folks, but but yeah, you want to you want to be cash flowing obviously. That's important. Yeah. What so what DSCR requirement do you guys have? Is it is it one or is it one and a quarter? It's so on short-term rentals it's one, right? So a lot of a lot of companies it is one and a quarter. With us it's one. On long-term rentals we can go down to 085 but we have to do a review on that property, get a kind of a business case put together on why we should lend on, you know, a sub one DSCR.

1:43But but we we've done it. If if it's a situation where rents are going to be raised or it's kind of an up andcoming area or something like that, that'll be taken into account. So Okay. And when you say payments, does that include taxes and insurance or just the mortgage? Yes, that would be taxes, insurance. That's pretty much all the PM everything everything your whatever the monthly payment is on the loan, put it that way. Yeah, that would be your your Yeah, your your full full mortgage payment. Okay. So, I I'm sure there's probably a few people who were trying to do some mental math there and might have missed some of this.

2:18So, just as an example, rent divided by payment. So, if you're making you buy a rental property that's bringing in $1,500 in rent per month, in order to qualify for the DSCR loan, one one ratio, your payment needs to be $1,500 or less. So, you know, if it's if it's more than that, then you're not you can go up to on a long-term rental, you can go up to 0.85, but if if it's a short-term rental to one to one. So, so yeah, that basically the reason for that is then the lender can look at the property to pay back the lender as opposed to you needing W2 income.

2:58So, anyone like I haven't had a a job in four years, you know, and so I've done lots of these over that time period. And so I think a lot of people think that, well, I I don't have income, I can't do deals. This is a perfect product for that. Yeah. So, so you said, you know, you don't know what I like for us, we're not not nowhere even close to one D, like if if we're close to one DSR, then I I would recommend not buying the property. Typically we're closer to like two DSCR.

3:30And I in in my opinion, that's the better way to go is buying a a property that cash flows really really well. So, 100%. Yep, I agree. So, what what are the qualifications for people then if they're So, you mentioned credit score. What type of credit score do they need? And then what else do they they need to provide to to qualify for one of these loans? Yeah. So, qual qualification first is going to be credit, right? So, we need a 680 or higher credit. 680 is our minimum.

4:00Anything above 760 is going to be our top tier pricing. So, rates are going to be pretty heavily weighted on credit score. The difference between a 680 credit score and a 760 credit score is almost a full point, right? So, so yeah, it's a big thing when you're doing this in you want to have shiny credit, right? You want to try to get your credit up as high as possible. That way you're going to be getting better rates on all your properties. So, so that's one along with that 680. So it goes in 20 point increments. So 680 to 760. So it's all tiered pricing in between that in 20. So for instance 680 to 699, 700 to 719 and so on up to 760.

4:36Everything above 760 is going to be top tier pricing. And then we also require three established trade lines, right? So if you've got somebody like fresh out of college or something like that, we do want to see or just a new you know, we want to see three established trade lines. That means 24-month history on three established trade lines. Could be credit cards, mortgage, car note, anything like that. But that's just a that's way we want to look at payment history, right? We just make sure that that the borrower's got you know doesn't hasn't been making a bunch of late payments, things like that, because that can kind of carry over into into a loan, right?

5:10So we look at that. Let's see on short-term rentals, we do have an experience requirement. Long-term rentals, we do not. So long-term rentals, you can be a first-time home buyer. No experience required. Short-term rentals, we do want to see 12 months mortgage experience within the last 3 years. So, and that can be that can be personal your primary or that can be investment properties. Got it. Okay. That makes sense. And and if somebody doesn't have the experience, could they partner with somebody else as like a co-signer on the loan or how does that work?

5:46So, we don't do it wouldn't be a co-signership. So, if it's going to be multiple like business part, you know, investor part investing partners, it needs to be in an entity, right? You would need to form an LLC or some kind of some kind of entity. The only partnership I guess would be if it's a spousal couple, right? If you got a if you got a you know, with a spouse, then we can do it individual. But as far as on if it's going to be you know, two you know, two you know, two investors, it's going to yeah, they would need to form an entity for us to be able to do that.

6:18There wouldn't be co-ownership or anything like that. And then we take the primary gear. So one of only one of in an entity situation we only use one of the one of the members credit right so the the primary guarantor would be the who we would use and they need to be an equal or majority owner in the entity so if it's a twoerson 50/50 or higher u three person you know and so on they just need to be an equal majority owner for us to use them. Got it. Okay. So, you form an LLC, create a operating agreement that just says that you're both owners on it at least 50% if you're going to be the the the the signer on it, the primary.

6:52That makes sense. Okay. And then, when it comes to getting like a preapproval letter, because like I know a lot of people, that's the first step is they want to get a pre-approval, but they don't have a deal yet. So, how does that process work? Do you just run their credit initially and then how do you know what they're approved up to? Yeah. So, it's process kind of usually what I like to do is run numbers on the property first, right? That's kind of a baseline start. Let's look take a look at it. See what see what we're looking at here. At that point, if they decide, hey, I'm going to make an offer on this property.

7:24I like it. Then they can come to me and I can I can write up a I've got a pre a pre-quall letter I can send over that works 99.9% of the time. And and that's pre don't have to pull credit before that. Right. At that point we're kind of going honor off honor system because at point of applications when we're going to pull credit and then we're going to see right so but yeah for that pre-quall letter I can I can get that sent over right away. Usually some sometimes when I'm when I'm quoting it they ask for a pre-qual letter I can send it all together and they can go get it done. So pre-quall letter is easy.

7:55That's an easy easy step. Yeah. Yeah. And I I I hear people all the time that I work with like or in that are, you know, just getting started, they use that as an excuse not to be putting in offers. And I tell them like it's actually not that big of a deal. Like it's again, like you mentioned, it's sort of like the honor system. You're you're giving information to the lender and they're saying based on what I'm hearing, yes, you're qualified for this. And then there's a lot of more work after you get it under contract, but you shouldn't let that hold you back. You can get a pre-qualification letter pretty fairly simply.

8:29So that's that's great. As long as the numbers work out and look good, you know, then Yeah, for sure. I mean, it's that's that's that's kind of the way that the way the process works with us, for sure. Yeah. And that's a good point, too. Like, it's a good screening mechanism for the investor, like if you look at it and you're like, dude, this this deal doesn't make any sense. You're going to lose money on a monthly basis. Yeah. It's Yeah. I mean, it's kind of a no-brainer. I mean, yeah, I mean, it's I mean, if you want to get into a situation like that, but yeah, it's usually usually I'll kind of be the you know, the dealer at the table kind of and be like, you know, might might want to you know, double check on that.

9:07I want to go that direction, right? So, yeah. Yeah. And that's I remember in the beginning when I was just getting started, I was kind of frustrated at lenders who would say, "Oh, no. This isn't a good deal or I won't lend on this." But looking back, they probably saved me on some deals. So, use that. So I guess what are the biggest reasons that you see most people get denied then for for financing? Yeah. I mean, obviously credit, right? Here's one of the big things is a lot of folks don't understand on credit that there are different versions of FICO, right?

9:41FICO's got FICO 1 through FICO 10. So, they'll look at their credit card or through their bank and they'll pull FICO 8, for instance. So FICO 8 is a very generalized credit u version that it's always higher than the the credit version. So we we pull credit version three or excuse me two four and five. That's what we're pulling and that's usually what most you know for lending for mortgage lending that's what they're going to pull. So folks will see that they'll pull off of their you know bank or through their credit card. Or they'll they'll pull it and they think really high number and then we they come to me and then we pull it and they're like they don't understand why it's lower because usually these the FICO we pull are going to come in lower.

10:20So that's a big big you know if somebody's like oh I got 6 680 on you know and and they're pulling 508 they're probably going to be around 650 on on you know the morg. So that's that's one big thing. I always tell people it's worth so myfico.com not affiliated with them at all but that's the best place you can go that we found where you can actually pull like soft pull those particular versions and usually folks that I have that are using that when I pull credit I mean it's pretty much spoton. So, it's a paid service, but you can you can cancel at any time, right?

10:53So, if you want to monitor your credit and get it to a certain point, that's a probably a pretty pretty it's not expensive. It's a pretty good investment just to do that just to make sure you know, because they these investors, you know, they kind of live and die by their credit. I mean, you want when you're getting ready to get a property, you don't want to if you've got something forecasted next month, you don't want to load up your credit card this month, right? You don't you want to kind of think that out before you you know because loading you know maxing out credit cards is going to is going to spike you know or going to drop your credit. So that's one thing to think about you know where your credit's going to be because again like I said difference between 760 and 680 is a full point on rate which is over time can that could be that could cost money.

11:33Them. Yeah. Interesting. Yeah. So, so the FICO score is one through eight. It's basically like how indepth or how deep of a poll it is. And so that's is that why it's typically less because it's less generalized probably. So, yeah, it's a little bit more generalized towards Yeah. If you go to myfico.com, they've got like a you can just type up there FICO versions or Google it FICO versions. It'll pull up a It'll pull up a a did you I think there's one a really good one myfico.com and it explains every single one of them.

12:08So if you want to kind of get burst in that I would I would recommend it's a good good fast read through. So but that's that's one reason people get denied. Another reason is just going to if properties are too unique, right? So we only lend on certain we don't lend on, you know, log we lend on not going to say we don't lend on log cabins. So it just really depends on the property itself. It's if if it's like a Cville, Tennessee, a really, you know, the really nice kind of modern log log cabins, you know, style properties, then we definitely lend on those. But if it's you know, out in the middle of nowhere and it's kind of a Lincoln log type chinch together type type cabin, you know, we you know, we we'll review it, but don't usually get sometimes properties can be a little bit too unique.

12:46Like I had somebody that brought me a treehouse that was really nice. It was made by the the treehouse guys or whatever that one guy that's on that builds those tree houses. Was amazing. Maybe. But yeah, we could we couldn't lend on it. But but yeah, so that would be I guess product unique properties. Trying to think what else might be a barrier to non-owner if it's owner occupied at all, we'll deny it. So right so that and that includes at arms. So if you got siblings or you want to put a kid in there one of your children or you know spouse or not spouse but like you know parents, uncles, aunts, that these are non-owner occupied loans, right?

13:24And that there's a law around that. So, it's we're we've got to, you know, monitor that when we go through if we can if we find that that's the case, then yeah, it can it can flag the loan and and kill the deal. So, so these are investors. You want to investment, you know, loans, you want to kind of make sure that you know, kind of family out of it as on when we're lending on them. Yeah. Yeah, that makes sense. And and to your point on the credit too, you you mentioned something earlier that I think maybe some people didn't hear or I just want to reiterate is that these loans don't show up on your personal credit.

14:00So the great thing about this is like you can keep doing I mean do you guys have a limit on any on the number of loan DSCR loans you're willing to do? I mean so our guideline minimum is eight eight per month, right? But that can be exceeded with a review. You know, if somebody brings me a 10 pack of of refinances they're wanting to do or or you know, scooping up a bunch of properties, we can usually we can usually get it reviewed and do it. I mean, we'll look at the borrower obviously. But we've got a two $2.5 million exposure limit, right?

14:31So, once that borrower gets to that level, then we'll re-evaluate, you know, our our executive routine or executive review team will take a look, you know, at the they'll go in and look at the power, right? See if this is this guy's solid making payments, everything like that. And then I mean, nine times out of 10, they'll give the increase if it's a, you know, solid borrower. So, yeah, every time I run for for folks, they they give me an increase. So, Got it. Yeah. Yeah. And I don't know too many people are doing more than eight deals a month right now.

15:02Exactly. Yeah. So that I mean, but that's the cool thing about is like a lot of people are probably worried, well, if I do one of these, it hurts my credit because it's a new credit line on my credit, but it doesn't show up. So like, you know, we we have really high credit. My wife and I have really high credit because we really don't have any consumer credit on our we just have our personal mortgage on our credit and that's it. But yet I have millions of dollars of loans out there on DSCR loans that, you know, are off my credit.

15:33They're business. They're basically treated as business credit because it, you know, they're they're in the name of my business. You know, those are all in LLC. So, so I can consistently buy more properties without, you know, it it impacting my credit score, which is really great, right? And just debt to income. Obviously, if it's not on your credit, it's not hitting your debt to income, too, right? Yeah, you get you get folks that come in and they've got, you know, they'll do a couple conventional loans and then you get squeezed at a certain point once you've got enough, you know, a couple properties on your on your on your credit and debt to income.

16:06That's when we look a lot more shiny or folks just start out with us and they can just, you know, if you can come up with a down payment, then we can, you know, you can start building out and stacking properties. Yeah. And and can you partner with someone on the down payment? Or how how does that work? Have you seen people get kind of creative around that? Because obviously everybody runs out of down payments at some point, right? Yeah. I mean, they would just have to form an LLC like I was talking before and we don't really do crowd sharing where it's like a, you know, 15 people coming in and, you know, and going on a, you know, invest in investment type of property.

16:39But, usually in a situation like that, if you've got somebody that's kind of the money man and, you know, they're want to partner up with somebody else, then absolutely. I mean, they they can or if they they both want to go in, you know, bibs on it or whatnot, yeah, they just they would need to form an LLC. That's all we would need. Yeah, no problem. Yeah. So, I mean, this should not be an impediment for people either. Like, you know, if you go out and you find someone who has a 401k, self-directed 401k or IRA, you could just form an LLC with them, they bring the money to the table, you do all the work, you split it, whatever, 50/50, 40, 60, whatever, in the operating agreement, and then you can still get those deals done.

17:16So, such a great great option. Another good another good thing on on that note right there, seasoning of funds, right? There's no seasoning of funds with us. So, we're not good bank statements, income statements, anything like that. So, we're not going to dig back. And a lot of times in conventional, they'll pick you apart. You know, if you put a deposit in there or you pull money out, they're going to, you know, they're going to, as long as it's in the account when we go through and check to make sure that the down payment's there, we're checking boxes and moving on. So,