Ever since the housing crash of 2008 it has been very difficult for real estate investors to get a loan on rental properties. Many investors lost their properties to foreclosure as a result of the crash and have been working to re-establish credit. Many other investors have been left with very few options to buy or refinance these properties. Why has this been the case? Ever since the crash, lenders have made it very difficult for investors to get a loan for rental properties. Tight credit standards and heavy scrutiny on personal income tax returns has made it nearly impossible for most investors.
More recently a solution to this problem has started to surface. Some lenders have started to base their lending decision for rental properties more about the rental income and cash flow of the actual property with less of a focus on personal income. Makes sense, right? The term is referred to as Debt Service Coverage Ratio (DSCR) and basically lenders want to see that the gross monthly rent on a property is somewhere between 100% and 125% of the monthly PITIA (Principal, interest, taxes, insurance and association dues, if applicable) on that individual property being underwritten. For example, if the monthly PITIA payment is $1,000/month an underwriter would want to see gross rent somewhere between $1,000 to $1,250 a month. Credit still matters and so does loan to value (LTV) which is the amount you are borrowing as a percentage of property value, but lenders feel if the property has a strong DSCR there should be less of a concern about that borrower’s personal income as the property shows that it has the ability to support the debt based on the rental income received.
Additionally, most lenders are allowing borrowers to put these properties in the name of an LLC or corporation which is huge for investors. Holding a property in the name of an LLC offers potential tax benefits to investors and at the same time reduces exposure from a liability stand point.
Using DSCR as a way to analyze and underwrite a rental loan is a formula that has been commonplace in the commercial lending world for years. Its only until recently that lenders are applying this formula to 1 to 4 family rental properties.
Many landlords and real estate investors are taking advantage of these DSCR rental loan products to finance new acquisitions or refinance parts of their rental portfolio to free up capital for future acquisitions.
Interested in a rental loan? First Equity Funding lends in 40 states and offers aggressive rates and leverage. To speak with one of the hard money lenders from First Equity Funding, contact us today.