A DSCR cash-out refinance is a popular strategy for real estate investors who are looking to unlock the equity in their rental properties. Considering home prices in the US have grown by 18.7% from 2021 to 2022, the equity you have in your rental property may have grown. It’s an innovative financing option that allows investors to access cash for various reasons, like renovations or even other investment opportunities.
In this guide, we’ll be covering everything you need to know about DSCR cash-out refinances. Let’s get started!
What Is a DSCR Cash-Out Refinance?
A DSCR cash-out refinance replaces your existing mortgage with a new, larger DSCR loan to give investors access to the equity built up in their rental property. The difference between the property’s appraised value and the amount owing on the previous mortgage is paid out in cash. Compared to traditional cash-out refinances that focus on your personal income, DSCR loans focus qualification on the property’s rental income instead.
How Is DSCR Calculated for a Cash-Out Refinance?
DSCR, or debt-service coverage ratio, measures a property’s ability to cover its debt obligations with its rental income. To calculate DSCR, the property’s net operating income (NOI) is divided by the total debt service, which includes principal and interest payments. A DSCR of greater than 1.0 indicates the property generates enough income to cover its mortgage payments.
Conventional Cash-Out Refinance vs. DSCR Cash-Out Refinance
While both types of cash-out refinance can allow you to unlock equity in your home, they differ mostly in their qualification criteria. Traditional cash-out refinances focus on the borrower’s personal income, credit score, and debt-to-income ratio. In contrast, DSCR refinances focus on the property’s cash flow, as measured by the DSCR calculation. This means that investors with substantial rental income but limited personal income may qualify for a DSCR loan even if they might struggle to qualify for a traditional cash-out refinance.
Advantages of DSCR Cash-Out Refinance
- No tax returns, pay stubs, or W2s required
- Use the property’s income to qualify, not personal income
- Access your rental property’s equity in the form of cash for various purposes
- Potentially allows for higher loan amounts depending on property’s income
- One streamlined monthly payment
Disadvantages of DSCR Cash-Out Refinance
- Limited availability
- Only available for rental properties and not primary residences
- Risk of vacancy periods
DSCR Refinance Details
What Can Cash-Out Refinance Funds be Used for?
Proceeds from a cash-out refinance can be used for a wide range of purposes, including:
- Home improvements
- Debt consolidation
- Large purchases
- Other investment opportunities
- Emergency fund
- Medical expenses
DSCR Cash-Out Refinance Costs
DSCR cash-out refinance costs can vary depending on several factors, including the loan amount, property location, and lender. Similar to traditional cash-out refinances, you can expect to pay closing costs such as appraisal fees, title insurance, lender fees, and even origination fees or points. Average closing costs for a refinance typically range from 2% to 6% of the loan amount.
To understand all associated costs with a DSCR cash-out refinance, it’s essential to carefully review the loan estimate provided by the lender. It’s important to remember that while some lenders may advertise “no closing costs” options, these fees are often rolled into the loan terms, which could potentially impact your interest rate or monthly payment.
DSCR Cash-Out Refinance Lenders and Loan Options
Not all lenders offer DSCR cash-out refinance loans, making it that much more important to look for lenders who specialize in this type of financing. A thorough understanding of DSCR loans is essential to stay informed throughout the process and secure the best terms. Partnering with a lender experienced in DSCR financing can significantly streamline the process and increase your chances of approval. Defy Mortgage stands out in this space by providing flexible and customizable loan solutions tailored to the unique needs of real estate investors. Our expertise and personalized approach can help you secure the best possible terms and leverage your property’s equity. Contact us today for a free consultation.
DSCR Cash-Out Refinance Timeline
The timeline for a DSCR cash-out refinance varies on the lender’s processing time and how responsive the borrower is. Typically, a DSCR refinance can take anywhere between 30 to 45 days to close. However, if the required documents are completed quickly, it’s possible to expedite the process. To close faster, remember to:
- Promptly provide all requested documentation
- Address any underwriting conditions quickly
- Ensure a clear title on the property
At Defy Mortgage, we strive to deliver exceptional service and expedite the closing process. We aim to close your DSCR cash-out refinance as quickly as possible. No surprises. No hoops. No stress.
DSCR Cash-Out Refinance FAQs:
- What is DSCR cash-out refinancing?
A DSCR cash-out refinance is a new, larger loan that replaces an existing mortgage and allows real estate investors to access the equity built up in their rental property. Qualification for a DSCR loan is based solely on the property’s rental income, not the borrower’s personal income.
- How is the DSCR calculated?
DSCR is calculated by dividing the net operating income (NOI) of a property by its total debt service (principal and interest payments on the loan). A DSCR of 1 means the property generates just enough income to cover its debt obligations.
- What is a good DSCR for refinancing?
Generally, lenders prefer a DSCR of at least 1.25 or higher for refinancing, but some lenders may consider lower DSCRs. At Defy, we require a minimum DSCR of 0.75.
- What types of investment properties are eligible for a DSCR cash-out refinance?
It depends on the lender, but many allow DSCR refinancing for single-family homes and multi-unit properties.
- What are the benefits of DSCR cash-out refinancing?
Benefits include unlocking the property’s equity in the form of cash, potentially securing better loan terms, using the property’s income to qualify, no tax returns are required, and streamlined monthly payments.
- Are there any risks associated with DSCR cash-out refinancing?
Risks include the potential for higher interest rates depending on the market, limited availability, and potential vacancy periods.
- How much equity can I access with DSCR cash-out refinancing?
The amount of equity you can access depends on the lender, but typically you can refinance up to 75-80% of the property’s appraised value.
- What are the qualification requirements for DSCR cash-out refinancing?
Qualification requirements vary by lender, but at Defy, here is what we require for our DSCR cash-out refinances:
- A FICO score of 620+
- A maximum LTV of 85%
- A minimum DSCR ratio of 0.75
- 3 months cash reserve
- No income documents or tax returns required
- Foreign nationals allowed
- Interest-only option available
- No maximum loan amount
- What are the typical interest rates for DSCR cash-out refinancing?
Interest rates for DSCR cash-out refinancing can vary on a few factors like your credit score, the property’s income, and current market conditions.
- Can I use the cash-out funds for any purpose?
Yes, generally, the funds from a DSCR cash-out refinance can be used for any purpose, including reinvesting in more properties, renovations, debt consolidation, or other personal needs.
- How long does the DSCR cash-out refinancing process take?
On average, the process can take anywhere from 30 to 45 days, but it heavily depends on factors like property appraisal, underwriting, and the lender’s processing times.
