If you're looking for a loan to finance a real estate investment, you may have come across the term "DSCR hard money loan". This type of loan is popular among real estate investors, but what exactly does it mean? In this blog post, we'll break down the basics of DSCR hard money loans.
What is a DSCR?
DSCR stands for debt service coverage ratio. It's a metric that lenders use to determine whether a borrower can afford to repay a loan. The DSCR is calculated by dividing the borrower's net operating income by their debt service (i.e. their loan payments).
For example, if a borrower has a net operating income of $100,000 per year and their loan payments are $80,000 per year, their DSCR would be 1.25 ($100,000 / $80,000). A DSCR of 1.0 means that the borrower's net operating income is exactly equal to their debt service, while a DSCR above 1.0 means that the borrower has some cushion to cover unexpected expenses or vacancies.
What is a hard money loan?
A hard money loan is a type of loan that is secured by real estate. Unlike traditional loans, which are based on the borrower's creditworthiness and ability to repay, hard money loans are based on the value of the property being used as collateral.
Hard money loans are typically short-term loans with higher interest rates and fees than traditional loans. They're often used by real estate investors who need to act quickly to secure a property or who have been turned down by traditional lenders.
What is a DSCR hard money loan?
A DSCR hard money loan is a hard money loan that takes the borrower's DSCR into account when determining the loan amount and terms. In other words, the lender will look at the borrower's net operating income and debt service to determine whether they can afford the loan payments.
Because DSCR hard money loans are based on the property's income potential, they're often used for commercial properties like apartment buildings, office buildings, and retail spaces. The loan amount is typically based on a percentage of the property's value, with the DSCR being used to determine the maximum loan amount.
DSCR hard money loans are a popular financing option for real estate investors who need to act quickly or who have been turned down by traditional lenders. By taking the borrower's DSCR into account, lenders can ensure that the borrower can afford the loan payments and that the property has enough income potential to support the loan. If you're considering a DSCR hard money loan, be sure to work with a reputable lender who can guide you through the process and help you make the best financing decision for your needs.
Our FlipsterZ Lending division offers free DSCR preapprovals. Please reach out if you need any help.