Pros and Cons of DSCR Loans for Brokers Advising Investor Clients

As a broker, your investor clients depend on you for impartial advice and direct guidance. For those investors with Single Family Residences, 2-4, and/or 5-8unit properties, Constructive Capital offers a compelling DSCR rental loan program designed especially for these investors. Here’s what to know when advising your clients as well as the pros and cons of DSCR loans. 

What are DSCR Rental Loans?

A DSCR Rental Loan is centered on the Debt Service Coverage Ratio; the ratio of a property’s net operating income (NOI) to its total debt service (loan principle, interest, taxes, insurance and HOA fees – also known as the PITIA). DSCR loans focus on a property’s rental income rather than an individual’s salary or W-2 income. That makes it possible for clients who have strong rental cash flow (including those who are self-employed, work on commission or otherwise have non-traditional incomes), to secure financing more easily.

What are the Advantages of DSCR Loans?

DSCR loans offer a number of concrete advantages and benefits to real estate investors who have strong cash flow from rentals but may not have traditional payslips or income verification documents.

Flexible Income Requirements

Because DSCR loans look at property cash flow, they open the door for investments from clients who are self-employed, entrepreneurs or independent contractors. They also pave the way for investors who prefer to use options like Airbnb or short-term rentals rather than long-term leases. Essentially, the loan hinges on the property’s earning potential, not the borrower’s traditional income.

Streamlined Qualification Process

Through Constructive Capital, our broker’s investor clients don’t need to verify their income or employment, greatly streamlining the qualification process. With fewer document requests, faster underwriting and a quicker approval process, you’re able to simplify deals and attract a broader swath of investors to your business.

Faster Funding Speed

Our efficient process will enable your investor clients to gain approval and get funded, fast. With our 30-day rate lock, you can give your own clients peace of mind while focusing on both speed and accuracy – enabling them to secure properties in competitive markets before offers expire.

Terms that Align with Your Strategy

We offer both interest-only and fixed-rate options, and most of our DSCR loans are amortized on a 30-year term.. We’re also able to underwrite for individual properties or rental portfolios. With up to 80% LTV for Purchase/Rate & Term and up to 75% OTV for Cash-Out Refinances, Constructive’s DSCR product provides significant residential real estate investment opportunity. We can lend up to $2M for approved investors, and our focus is on Single-Family Residential Properties as well as 2-4 and 5-8 units. There has never been a better time to align your own solutions with your investors’ respective strategies.

Competitive Pricing

Our competitive pricing and reliable funding comes from a variety of capital channels. Combined with our 30-day rate lock, your investor clients can enjoy greater certainty and peace of mind in a fluctuating market, while you position yourself as a trusted, knowledgeable expert who provides rate stability and reliability in delivering unique lending solutions.

Broker-Focused Partnership

At Constructive Capital, we’re focused on providing ongoing support to our Client Broker Partners. Our Account Executives are available for product support and assistance with your pipeline, while helping you to manage deals more efficiently and generate repeat business.

Diversity Your Portfolio

Investment property financing can be a significant part of your Brokerage’s overall mortgage loan portfolio, and they can be a great diversification tool for especially traditional Mortgage Brokers who have focused on conventional mortgages. These business purpose loans are less rate sensitive when compared to conventional loans, and therefore you can still grow even in a rising interest rate environment. In addition, since the underwriting is based on the property’s cash flow and not the investor’s income, this also offers diversification for your firm.

What are the Potential Downsides of DSCR Loans?

Even with all of the benefits of DSCR loans, there are still some potential downsides to be aware of as you work to educate your clients.

Property-Centric Qualification

One of the biggest benefits of DSCR loans is their focus on rental income. However, this could also be viewed as a weakness. For example, unexpected expenses like vacancies, maintenance and capital expenditures are not included in DSCR calculators, which means that it’s possible to underestimate the true carrying costs of such an investment.

We recommend advising your clients to model realistic vacancy numbers and save for repairs to cover their cash flow needs.

Not for Primary Residences

Keep in mind that all loans are strictly for investment purposes of non-owner-occupied properties. These are not loans intended for primary residences. Investors who want to live in a property part time or who are looking to purchase a vacation home may be better guided toward alternative financing options, including more conventional mortgages.

Minor Geographic Limitations

It’s important to note that Constructive Capital’s DSCR offerings are not available to buyers in Nevada, North Dakota, or South Dakota. Please verify regional eligibility before moving ahead.

DSCR Loans: A Powerful Tool for Investor Clients

DSCR loans have the potential to be an excellent opportunity for Mortgage Brokers looking to give non-traditional clients or those who rely on rental income a way to grow their investments. Due to the DSCR loans’ focus on property cash flow, along with conservative underwriting and fast funding times, Brokers can be well-positioned to offer these loans as a clear advantage in a competitive acquisition market.

At the same time, it’s crucial to educate your clients on the nuances – including vacancy risk, maintenance costs, and eligibility requirements. When combined with smart financial modeling, DSCR loans have the potential to create an ongoing advantage that deepens customer loyalty and investor relationships. Together with your own thoughtful, knowledgeable and experienced analysis, you can clearly reinforce your value as a strategic financial advisor.

Interested in learning more? Contact our Team at Constructive Capital today and our experienced Account Executives would be happy to answer any questions you may have as well as discuss how our DSCR rental loans, fix and flip loans and other products can broaden your offerings to your own clients.