These small apartment loans are a type of commercial real estate loan that is specifically designed for 5 to 8 units. These loans are used by owners to finance a purchase or a renovation.
Best Small Apt Option
5-8 Units Mixed Use & Apartments
Excellent terms for small apartments
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620+ Fico
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80% LTV
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30yr, 15yr fixed, IO Option
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DSCR – Use Rents to Qualify
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Loans to $3 Mil+
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Docs
Rents
Credit Score
620
LTV
80%
Max Loan
$5 Mil+
Features of 5-8 Units Program
- Long term amortizations – 30yr, 15yr
- Competitive rates
- Older properties ok
- Use rents to qualify
- Perfect credit not necessary
Benefits of 5-8 unit program
- Early payoff ok
- Reasonable refinance fees
- Esay property qualification
- Use equity for any purpose
- Fast closings in 30-40 days
Understanding DSCR Mortgage Loans for 5-8 Unit Properties
When it comes to investing in multi-unit properties, securing the right financing is crucial. One option for investors is a Debt Service Coverage Ratio (DSCR) mortgage loan. DSCR loans are specifically designed for commercial real estate investors and can be a good choice for those looking to purchase or refinance 5-8 unit properties. In this article, we’ll take a closer look at DSCR mortgage loans and how they work.
What is a DSCR Mortgage Loan?
DSCR mortgage loans are commercial real estate loans that use a property’s cash flow to determine the borrower’s ability to repay the loan. The loan is based on the property’s Debt Service Coverage Ratio, which is the ratio of the property’s net operating income to its debt service. The higher the DSCR, the more cash flow the property generates and the more likely it is to repay the loan.
For example, if a property generates $200,000 in net operating income per year and has $150,000 in debt service payments, its DSCR is 1.33. This means that the property generates 1.33 times the amount needed to cover its debt service payments. In general, lenders prefer to see a DSCR of 1.25 or higher when considering a loan.
Why Choose a DSCR Mortgage Loan?
There are several reasons why investors might choose a DSCR mortgage loan for their 5-8 unit property:
- Cash Flow-Based: DSCR loans are based on the property’s cash flow, which can make them a good choice for investors who have limited personal income or who are just starting out.
- Flexible Terms: DSCR loans typically have longer terms than traditional residential loans, ranging from 10-30 years, and may have lower interest rates.
- Higher Loan Amounts: Because DSCR loans are based on the property’s income, investors may be able to secure higher loan amounts than with traditional loans.
- Opportunity for Investment: Investors can use DSCR loans to purchase or refinance 5-8 unit properties, which can provide a steady stream of rental income and potential for appreciation over time.
Qualifying for a DSCR Mortgage Loan
To qualify for a DSCR mortgage loan, borrowers must meet certain requirements:
- DSCR Ratio: As mentioned earlier, lenders prefer to see a DSCR of 1.25 or higher. This means that the property’s net operating income must be at least 25% higher than its debt service payments.
- Credit Score: Borrowers typically need a credit score of 650 or higher to qualify for a DSCR loan.
- Experience: Some lenders require borrowers to have experience owning or managing multi-unit properties.
- Down Payment: Borrowers typically need a down payment of at least 20% to qualify for a DSCR loan. However, some lenders may require a higher down payment depending on the property and the borrower’s financial situation.
Pros and Cons of DSCR Mortgage Loans
Advantages of DSCR Loans
DSCR loans offer several advantages over other types of financing, particularly for investment properties with 5-8 units. Here are some of the benefits of DSCR loans:
Higher Loan Amounts:
DSCR loans allow you to borrow a higher amount of money compared to traditional residential mortgages. This is because the loan amount is based on the property’s income potential rather than your personal income.
Lower Interest Rates:
DSCR loans typically have lower interest rates compared to other types of commercial loans. This can help you save money over the life of the loan.
Longer Loan Terms:
DSCR loans often have longer loan terms, up to 30 years, compared to other commercial loans. This can help you manage your cash flow and make your monthly payments more affordable.
No Personal Income Verification:
Because DSCR loans are based on the property’s income potential, there’s no need to verify your personal income. This can make the loan application process faster and more straightforward.
Lower Down Payment Requirements:
DSCR loans often have lower down payment requirements compared to other types of commercial loans. This can help you preserve your cash and invest in other properties or projects.
Disadvantages of DSCR Loans
While DSCR loans have several advantages, they also have some disadvantages to consider:
Higher Interest Rates:
While DSCR loans often have lower interest rates compared to other commercial loans, they typically have higher interest rates compared to residential mortgages.
Stricter Qualification Requirements:
DSCR loans have stricter qualification requirements compared to other types of financing. Lenders will typically require a minimum debt service coverage ratio of 1.25 or higher, and may also require a higher credit score and more financial documentation.
Limited Eligibility:
DSCR loans are typically only available for investment properties with 5-8 units. If you’re looking to finance a smaller or larger property, you may need to consider other types of financing.
No Owner-Occupied Properties:
DSCR loans are only available for non-owner occupied properties. If you plan to live in one of the units in the property, you’ll need to consider other financing options.
Conclusion
DSCR loans can be an excellent financing option for investors looking to purchase or refinance a 5-8 unit investment property. These loans are based on the property’s income potential rather than the borrower’s personal income, which can make them more accessible to investors. DSCR loans also offer longer loan terms, lower down payment requirements, and no personal income verification, making them a great choice for investors looking to grow their portfolio. However, they do have stricter qualification requirements and are only available for non-owner occupied properties. As with any financing option, it’s important to carefully consider your financial goals and the terms of the loan before making a decision.
