What factors affect a DSCR interest rate?
The Debt Service Coverage Ratio
DSCR stands for Debt Service Coverage Ratio. It is a metric used to assess the ability of a borrower to cover their debt obligations of the investment property. The DSCR is calculated by dividing the net operating income (NOI) of a property by its total debt service, which includes principal and interest payments on the loan. Click here for the DSCR Calculator.
If the Debt Service Coverage Ratio or DSCR is under 1.0, you can expect a higher rate than if the rate is over 1.0. A DSCR of 1.25 or over comes with a significantly lower rate than a DSCR of .80.
Credit History
We use your credit history to determine the level of risk associated with lending you money. A good credit history indicates that you have a track record of responsibly managing your debts, making payments on time, and maintaining a low level of debt relative to your income. This gives lenders confidence that you are likely to repay the loan as agreed upon.
Loan Purpose
Whether the loan is for a purchase, rate and term refinance or a cash-out refinance will affect the rate. Refinances will likely have higher rates than purchase loans. Cash out refinances will likely have higher rates than straight rate and term refinances.
Loan to Value
The lower the loan to value, the lower the interest rate. If the property is worth $1,000,000 and the loan size is $500,000, that is a 50% loan to value. That loan would receive a better rate that one with a $800,000 loan amount, or 80% loan to value.
Prepayment Penalties
Loans with higher prepayment penalties usually come with a lower interest rate. Opting for a 36 month prepayment penalty may make smart financial sense, especially if you plan to hold onto the property for a few years. So, when applying for your DSCR loan, carefully consider whether you plan on selling or refinancing the property in the next three years. If not, then opting for the 36 month prepayment penalty will result in a significantly lower interest rate
Selling or refinancing within the prepayment penalty period will result in financial penalties of 5% of the outstanding loan balance.
Interest Only Payment Option
Selecting an Interest Only payment option can be great way to maximize monthly cash flow and results in a higher DSCR ratio. The Interest Only payment option does, however, come with a higher interest rate. Whether or not to select an Interest Only payment option comes down to what is most important to a property investor – maximizing monthly cash flow or getting the lowest interest rate possible.
Reserves
Reserves are required for mortgage loans to ensure that borrowers have enough funds to cover potential financial challenges that may arise after obtaining the loan. Reserves act as a safety net and demonstrate to the lender that the borrower has the means to make mortgage payments even in unexpected circumstances. These reserves can be in the form of cash or other liquid assets such as savings, stocks, or bonds.
FICO Score
Your FICO score plays a significant role in determining the interest rate you receive on a loan. The higher FICO score, the lower interest rate. Generally, a higher FICO score indicates that you have a strong credit history and are more likely to repay your debts on time.
In addition to affecting the interest rate, your FICO score can impact your loan eligibility. LendSure’s DSCR Investor Cash Flow Loan has a minimum credit score of 660.
Mortgage/Rent History
Your mortgage/rent history demonstrates your track record of making timely payments for your previous housing arrangements. By reviewing this history, we can assess your reliability and responsibility as a borrower. If you consistently paid your mortgage or rent on time, it indicates that you are likely to do the same with your new loan, making you a less risky candidate.
The Property Type
Rural properties, condotels, 5-8 unit properties, and non-warrantable condos all tend to have higher interest rates than 1-4 unit properties.
Investor Experience Level
Experience matters when it comes to getting the best rate on a DSCR loan. Experienced property investors can expect a lower interest rate than a first-time property investor.
Points
Points, also known as discount points, are fees that borrowers can choose to pay upfront to lower their interest rate over the life of the loan. While paying points requires an initial upfront payment, it can lead to long-term savings on interest payments. If you plan to own the investment property for a considerable period, paying points can potentially save you money over the life of the loan.
Paying points is an individual decision that should align with your financial goals and circumstances. Consider factors such as your budget, long-term plans, and available funds.
Citizenship/Residency Status
LendSure’s DSCR loan program is available to US citizens, Permanent Resident Aliens, Non-Permanent Resident Aliens, and Foreign Nationals.
Non-Resident Alien loans are capped at 75% LTV and are priced slightly higher.
Foreign National loans are capped at 70% loan to value and are priced higher than non-resident alien loans.
