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Almost all DSCR Loans start with the same process – a first touchpoint with a lender to introduce the transaction and to get initial quotes to determine a rough estimate on whether you qualify, what types of rate and terms you will have options for and in some cases, to attain what’s called a pre-qualification letter that asserts eligibility and the size of the loan you are likely able to attain based on limited information. DSCR Loans are typically broken into two types: refinances (a loan where you already own the property) and acquisitions (using the loan to purchase a new property), and the processes and steps for each will be similar, but somewhat different for obvious reasons.
For example, pre-qualification letters are an aspect for purchase transactions (or acquisitions), and are often a prerequisite for real estate agents and property sellers to allow you to start touring and evaluating properties (so they know they are not “wasting their time” with an unqualified buyer that couldn’t get financing to buy their listing). But because nobody is selling a property on a refinance, pre-qualification letters aren’t a document you will encounter on a refinance.
Almost all DSCR Lenders and mortgage brokers will gladly speak to potential borrowers about what their loan options may look like before requiring a full application or anything more than a light inquiry or message. Generally, lenders will need to know the following information to provide a quote:
From the above, DSCR Lenders are likely going to be able to fill out their pricing tools for a preliminary estimate and these tools (or “rate sheets”) are also built to easily toggle different options (such as interest rate and points combinations) to generate an idea of what terms can be offered. All of this information is going to be fully verified and confirmed (remember, DSCR Loans are far from “no doc” or “NINJA” loans where actual loans were given out based on the borrower’s word and estimates), but these preliminary terms should do a good job of providing a good guess on where a borrower stands (and where the market rates are at the moment).
In the world of DSCR Lender credit checks, there is a differentiation between what is called a “soft pull” and a “hard pull.” For better or for worse, a “hard” credit check, for when a full credit report is ordered and run and provides great detail, can be a negative factor that reduces your credit score! For this reason, many people, especially real estate investors that are frequently adding to their portfolios, are weary of granting a lender the opportunity to do full credit reports very early on in the process such as in the quote stage, since the deal may be just an idea and low probability, and harming your credit through an official hard pull isn’t worth it. On the other hand, getting accurate quotes for what you qualify for, in which FICO score plays a large role in both qualification and rate and terms, is also critical so that investors can accurately “run the numbers” when shopping for properties.
One solution for this problem is what is called a “soft credit check” or (“soft pull”). This allows lenders to do a scaled-back version of a full credit report to get a mostly accurate credit score for a potential borrower, without the inquiry harming credit. For this reason, it’s the “best of both worlds” in that investors can get a much more accurate set of quotes (instead of one based on their own estimated credit guess) without harming their own FICO rating. When and if the deal progresses towards a more certain transaction, a full credit report can be ordered later on in the process.
For purchase transactions in which an investor is considering utilizing a DSCR Loan to finance the acquisition, a pre-qualification letter is often necessary. The good news is that many lenders and brokers will gladly whip up a pre-qualification letter without much actual “qualification” involved. While some DSCR Lenders will require a hard credit pull to disseminate an official pre-qual letter, some will be fine with a soft pull number or just an estimate, especially if you are a repeat borrower that has qualified and closed a loan with them before. While most conventional lenders and mortgage brokers will require diving into finances (primarily for DTI purposes) before issuing a pre-qualification, since DSCR lenders don’t use the DTI calculation at all to qualify loans, this is not necessary, and a pre-qual letter is typically a much easier and quicker process for DSCR Loans than conventional loans.
You usually don’t need to supply bank statements or any docs at this pre-qual stage except maybe proof of funds for down payment if you’re making an offer (some stickler sellers/listing agents often want to see that, especially at the higher-end and for higher-cost properties). This lower upfront “pre-qualification” hurdle is yet another example on the long list of reasons why so many real estate investors love using DSCR Loans for their investments versus other traditional options.
Note that these quotes and pre-qualification letters are always non-binding on both sides, for the investor (potential borrower) and the lender. There should always be all types of disclaimers from the lender saying these are rough estimates and not a promise to lend. On the flip side , there is no need for the investor to commit to anything or pay for anything at this stage either – if a lender or broker attempts to charge any fees at this stage, this is a red flag and you should immediately shop for other options.
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