One of the biggest advantages of DSCR Loans is flexibility and adaptability. Private lenders with their own policies, prices and guidelines and the ability to grant exceptions and evaluate deals with common sense and on a case-by-case basis is often a very refreshing change for real estate investors used to both the cookie-cutter constraints of conventional loan programs and the real estate reality that lots of things can and do go wrong. – “It’s always something” is a common refrain of experienced investors for a reason! DSCR Lenders have much more ability and willingness to work with investors (borrowers) to tackle obstacles and things that inevitably come up that jeopardize deals. Simply put, DSCR Lenders are best equipped to help and to power through together with the borrower towards a successful close.
However, the enhanced flexibility and varied guidelines and policies can sometimes be a double-edged sword. Just because DSCR Lenders can offer expanded programs and options, and grant exceptions on hairy deals, doesn’t mean they always do. Further, deals and applications that would have been shut down and stopped at the pre-application stage for banks and conventional lenders can move toward the process for a DSCR Loan – and incur valuable time and expenses that can’t be gotten back – only for something to kill the deal before it can close. And this can be a worse outcome than if the application wouldn’t have been taken at all!
One important thing for real estate investors using DSCR Loans to remember – especially in inevitable times of stress and frustration – is that the lender wants to successfully close the loan just as much as you. Lenders make money from closing loans – not killing deals. However, they are restrained by responsible risk management and the necessary constraints of independent third parties (like appraisers) in the system. Nevertheless, the DSCR Lender is typically on your side, willing and incentivized to get the loan closed as much as possible. Understanding this reality and working productively with your lender can ensure the highest probability of success and long-term scaling.
While there are DSCR Loan obstacles that simply can’t be overcome – nothing either the borrower or lender can do on their side, many significant obstacles during the DSCR Loan process can be worked around and fixed, salvaging your loan and getting to funding. This bonus chapter will walk through the top 10 common obstacles that can put a DSCR Loan in jeopardy during the loan origination cycle – and how you can be best prepared to work with your lender to overcome these obstacles successfully and close.
Here are 10 Common Obstacles faced by DSCR Loan Borrowers along with specific examples for each plus three inside knowledge tactics on how to prepare and overcome these hurdles to get your deal across the finish line!
Common Obstacle #1 - Appraisal Value Comes in Low
Common Obstacle #3: DSCR Ratio Dips Below Threshold When Final Numbers Replace Estimates
Common Obstacle #4: Interest Rates Move Higher (No Rate Lock) or Lock Expires
Common Obstacle #5 – Title Issues for DSCR Loans
Common Obstacle #6 – Signing Issues for DSCR Loans
Common Obstacle #7 – Large Deposit Sourcing for DSCR Loans
Common Obstacle #8 – Entity Documentation Issues for DSCR Loans
Common Obstacle #9 – Surprise at the Closing Table for a DSCR Loan
Common Obstacle #10: Post-Close Servicing Scares for DSCR Loans
While every situation is unique, the problems associated with DSCR Loans are fairly predictable, both in terms of how they appear, and how to best protect against them. The appraisal report is the source of the most frequent hurdles, as the first two obstacles showed - a low appraised value or subject-to determination is the most common way DSCR Loans get thrown off track. The third obstacle, when a DSCR ratio dips below a key mark, can also be sourced from an appraisal report, i.e. a low 1007 market rent figure, but also from other things like insurance or property taxes coming in high.
Obstacle four covers how lack of preparation and understanding of the nuances of DSCR Loan “rate locks” and how that works can cause issues, but how a well-informed borrower can avoid these issues with proper prep.
The next obstacles, five through eight, cover other issues that frequently pop up related to title insurance and vesting, small issues that can become a big snag for DSCR Loans. A robust understanding of all the nuances and potential problems in terms of getting every last detail right when it comes to who cleanly owns the property and who can legally sign the documents to finance them is key for every DSCR Loan borrower looking to scale. While these seem like minor items, they certainly punch above their weight in throwing otherwise smoothly progressing DSCR deals off.
Obstacle nine, which covers “surprises at the closing table” is more of a catch-all, but underscores the importance of asking questions and doing research on everything as soon as possible, so things don’t fall apart at the finish line. Finally, obstacle ten covers servicing issues, which while not an obstacle for actually closing a DSCR Loan, remains a huge hurdle for real estate investors to make the loan and investment worthwhile, and to keep a clean record for future investments.
This guide hopefully provides a comprehensive roadmap for understanding everything an investor could ever need to know about the world of DSCR Loans, and provides a handbook to successfully solve and overcome any problems that inevitably come their way. While DSCR Loans will likely continue to evolve and change over time, it’s pretty clear they are here to stay, and are the key financing tool for investors to achieve financial freedom through real estate now, and well into the future.
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