Real estate can be an amazing way to generate income. But what happens when a real estate investor wants to refinance their own home? I’ll tell you what happens - A NIGHTMARE ON LOAN STREET. But it doesn’t have to be that way.
Phil here, coincidentally from A Nightmare on Loan Street Blog. I want to talk about a scenario that might ring true for you. Picture this…it’s a cool afternoon, and you are enjoying a Zima on your patio reading the latest issue of GQ. Suddenly, an alert screams across your phone that reads “Interest Rates Have Dropped”. You leap into action because things have gotten so good, that it’s time to refinance.
But wait! You own real estate and use the monthly rental income to pay your bills. How do you go about proving your income to qualify for a new mortgage?!? I mean, your tax returns and W2 are going to be an issue with the big banks.
If this situation sounds familiar, you may want to consider the Debt Service Coverage Ratio (DSCR). This is a tool that lets a lender review your ability to repay debt, which is really helpful if you don’t have any/much income to show on your W2.
The DSCR begins with your net operating income and divides that by your expenses (both over the same period of time). If you end up with a score above 1.25, this typically demonstrates to a lender that you have the cash available to repay a loan.
Let’s say you have 2 properties that generate $10,000/month in rent. If your monthly expenses are $8,000, then this would mean the DSCR score is 1.25. If you read the last paragraph, you’ll know that this might put you in a good spot for a loan. If you only read this paragraph, I have a few questions as to why you started reading this blog post here.
Now remember, the DSCR is a specialty product. You likely aren’t seeing this as an option at Big Banks R Us. For something like this, you’ll need to find a company that takes a common sense approach to lending, like Truss Financial Group. Their mortgage specialists can help you learn about the DSCR, and how it can help real estate investors refinance. Now sit back, relax, and enjoy that Zima.
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