With home values still holding strong many investors are tapping into their investment property’s equity through a cash out refinance. However, most investors take full advantage of tax write-offs, which becomes problematic when trying to get approved for a mortgage. This is where DSCR loans come into play. Here we cover the most important things you need to know when getting a DSCR cash out refinance. 

What is a DSCR Cash Out Refinance?

First of all, DSCR stands for Debt Service Coverage Ratio.

This is a formula used to measure the cash flow available to pay current debt obligations.

In super basic terms, here is how the DSCR is calculated:

Let’s say the rent you charge on your property is $2,500/month

And your monthly mortgage is $1,800/month including taxes and insurance.

You would take 2,500 divided by 1,800. Giving you a 1.39 DSCR 

[2,500/1,800 = 1.39]

With a DSCR cash out refinance, the income piece of the mortgage approval is based on the DSCR on the new mortgage payment. 

What is the advantage of doing a DSCR cash out refinance vs. a conventional refinance?

Very simple: You do not have to provide tax returns, pay stubs, or W2s. 

Most real estate investors have substantial tax write-offs that result in very low income shown on their tax returns. 

Since that is the case, that makes it extremely difficult to get approved for a traditional loan. 

With a DSCR loan, the tax returns (or any personal income for that matter) are not taken into consideration. 

A DSCR loan is more of a common sense approach to evaluating your ability to repay the loan. 

What can I use the cash out for on a DSCR cash out refinance?

The most common uses of cash out are:

• Home improvement
• Cash for use of new property acquisition
• Debt consolidation
• General reserves
• Working capital

After closing, you will typically have the option to receive the funds in the form of a check or direct deposit into your bank account. 

How is the DSCR determined on a cash out refinance?

You will provide a copy of the lease agreement. In addition, a 1007 rent schedule will be ordered along with your appraisal in order to verify fair market rent. 

The lower of the lease agreement and 1007 rent schedule will be used when calculating the DSCR.

Example: if your lease states $1,500/month in rent, but the 1007 rent schedule is showing $1,300/month as fair market rent, the DSCR will be calculated based on $1,300/month.

What if my property is vacant?

If the property is not currently leased, the rent on the 1007 rent schedule will be used to qualify. 

You’ll need to provide a letter of explanation on why the property is vacant (recent renovation, in between tenants, etc.)

What about short term rentals (AirBnB/VRBO)?

Short term rentals are allowed when doing a DSCR cash out refinance.

A 12 month history of rents will be needed. Monthly or annual statements from AirBnB or similar service will be required. 

If you have less than a 12 month history on the property, a report from AirDNA Rentalizer will be needed. 

What if my property is showing negative cash flow?

If the DSCR is less than 1, there are still options available. 

There will be lower loan to value ratios requirements if the DSCR is <1, but there are still options even if the DSCR is as low as 0.75.

Consider using the cash out refinance to make improvements to the property so that you can add value, and increase rents to help with cash flow. 

Is a DSCR loan a no doc loan?

No. A DSCR loan is not a no doc loan. The main difference between a DSCR loan and a traditional loan is the income portion of the approval is based on property income, not personal income. 

You still need to meet the proper credit, asset, and property condition to qualify.

What lenders do DSCR cash out refinance loans?

Beware. Ever since the market shifted, a lot of loan officers started dabbling in DSCR loans. 

Working with and inexperienced loan officer results in frustration on all sides because they tend to set improper expectations, and ultimately borrowers can have a bad experience.

You’ll want to work with a broker/loan officer who is highly experienced in DSCR loans. This will help to ensure a smooth process and successful closing. 

In Summary | 5 Things You Must Know When Doing a DSCR Cash Out Refinance

1. DSCR loans are for investment properties only.
2. The income portion of the approval is based on property cash flow, not personal income.
3. If the property is currently vacant or showing negative cash flow, there are still options available.
4. Long term and short term rentals are acceptable.
5. It’s extremely important to work with a loan officer who is highly experienced with DSCR loans.

Bonus tip: the more organized you are with your documents, the faster you will close on your cash out refinance. Provide properly labeled, legible documents, in PDF format for your lender to review. Being organized with your docs will absolutely help expedite the process for a faster closing.

I invite you to reach out.

Get your questions answered.

We have been extremely successful with closing DSCR cash out refinance loans all over the country. If for some reason we cannot help, we will do our very best to point you in the right direction.