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80% LTV CASH-OUT DSCR LOANS
Any wholesale mortgage investors can do 80% DSCR CASH-OUT INVESTMENT HOME LOANS?
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1 Reply
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A cash-out refinance using DSCR (Debt Service Coverage Ratio) loans is a financing option that allows property investors to refinance an existing loan, take out equity in the form of cash, and qualify based on the income generated by the property rather than personal income. This type of loan is particularly beneficial for real estate investors with multiple properties or those who may not have traditional income documentation.
What is a Cash-Out Refinance?
A cash-out refinance involves replacing an existing mortgage with a new one that has a higher loan amount. The difference between the new loan amount and the old loan balance is paid out to the borrower in cash. This can be used for various purposes such as property improvements, paying off other debts, or investing in additional properties.
What is a DSCR Loan?
A DSCR loan is a type of loan where the qualification is based on the income generated by the property, typically rental income, rather than the borrower’s personal income. The Debt Service Coverage Ratio is a measure used by lenders to determine the property’s ability to cover its debt obligations.
DSCR Calculation:
<math xmlns=”http://www.w3.org/1998/Math/MathML”><semantics><mrow><mtext>DSCR</mtext><mo>=</mo><mfrac><mtext>Net Operating Income (NOI)</mtext><mtext>Total Debt Service</mtext></mfrac></mrow></semantics></math>DSCR=Total Debt ServiceNet Operating Income (NOI)
- Net Operating Income (NOI): The income generated from the property after operating expenses.
- Total Debt Service: The total mortgage payments (including principal and interest) on the property.
A DSCR of 1.0 indicates that the property’s income is sufficient to cover its debt payments. Lenders typically look for a DSCR above 1.2 to 1.25 for approval, which means the property generates 20-25% more income than the debt obligations.
Benefits of Cash-Out Refinance with DSCR Loans
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Access to Equity:
- Allows investors to tap into the equity of their property to fund other investments or needs.
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Qualification Based on Property Income:
- Ideal for investors who may not have traditional income documentation or have significant write-offs that lower taxable income.
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Leverage Investment Properties:
- Enables investors to use the rental income from properties to qualify, potentially allowing for the acquisition of more properties.
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Potential for Better Terms:
- With a good DSCR, investors might secure better loan terms such as lower interest rates or higher loan amounts.
Key Requirements and Considerations
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Minimum DSCR:
- Lenders typically require a minimum DSCR of 1.2 to 1.25. Higher DSCR indicates better financial health of the property and may qualify for better terms.
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Property Valuation:
- An appraisal will be required to determine the current market value of the property and its rental income potential.
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Loan-to-Value (LTV) Ratio:
- Lenders may have maximum LTV ratios, often around 70-75%. This means the loan amount cannot exceed 70-75% of the property’s appraised value.
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Documentation:
- While personal income documentation may not be required, lenders will need detailed financials on the property, including rent rolls, lease agreements, and operating statements.
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Interest Rates and Fees:
- DSCR loans might have higher interest rates compared to traditional loans due to the perceived higher risk. Be aware of closing costs and other fees associated with the refinance.
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Reserves:
- Lenders might require borrowers to have cash reserves to cover several months of mortgage payments, typically ranging from 3 to 12 months.
Steps to Obtain a Cash-Out Refinance DSCR Loan
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Evaluate Your Property:
- Determine the current value and income-generating capacity of your property.
- Calculate your DSCR to understand if it meets lender requirements.
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Research Lenders:
- Look for lenders who specialize in DSCR loans for real estate investors.
- Compare interest rates, fees, and terms.
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Prepare Documentation:
- Gather necessary property financials, including rent rolls, lease agreements, operating statements, and property appraisal.
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Apply for the Loan:
- Submit your application with the chosen lender.
- Provide all required documentation for the lender to evaluate your DSCR and property value.
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Underwriting and Approval:
- The lender will underwrite the loan, assessing the property’s income and financial health.
- Upon approval, the lender will provide the loan terms and conditions.
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Closing:
- Review and sign the loan documents.
- Pay any applicable closing costs.
- Receive the cash-out proceeds from the refinance.
A cash-out refinance using a DSCR loan is an excellent option for property investors looking to leverage the income generated by their investment properties to access additional funds. By focusing on the property’s income rather than personal income, DSCR loans provide flexibility for investors with complex financial situations. Understanding the requirements and steps involved can help you make the most of this refinancing option and potentially grow your real estate portfolio.
