Hey folks, welcome back to this month’s Breaking Down the Mortgage. I hope you’re doing well. Crazy that November is almost here, and pretty soon we’ll all be doing our pie parties.
I wanted to reintroduce you to this. I know you’ve heard of it, but I want to take a minute and go over a few details. The debt service coverage ratio loan. What is it? How does it affect you? Listings that are sitting around that are stale, or you got buyers, people that want to own a rental property, maybe buy your listing as a rental, or you have a buyer that is an experienced, not a first-time homebuyer, looking to own or build their portfolios. We know now is a good time to do that.
So, debt service coverage ratio allows you to use the cash flow only to qualify your folks, your clients, either way. So, people that are self-employed, that have good money, but their taxes are blown up. That’s your sweet spot. Or just people that don’t want to jump through hoops, that are building a portfolio, the debt service coverage ratio.
So, what is it? How does it work? It’s real simple. You get to use the cash flow of the rental property.
So, let’s go through this together. Again, this is for people. This is not first-time homebuyers, not second-home. It cannot be owner-occupied. It has to be a business-purpose rental property, both short-term. You can do this for Airbnbs, things like that, and also long-term stuff.
It does take money, like everything, though, right? You’ve got to have some reserves. That’s a given. But I wanted to show you the math involved. And I’m sorry I didn’t warn you. There is a little bit of math involved, but it’s really pretty simple.
So look at these three things. If the rent is $2,500 a month and the mortgage is $2,500 a month, it covers the nut and it’s a 1.0 ratio, then piece of cake all day long, not a problem. You’ll get the lowest cost possible.
Example number two: if the rent’s $3,000 a month and that mortgage payment is $2,500, well, it covers that nut by 20%. Even better, lenders like that, obviously. Why wouldn’t we?
Finally, this is where it gets a little more sticky. If the rent is less than the mortgage payment, those are doable, but the interest rates are higher. They’re harder to get pushed through. But that’s what you need to know.
Now, how did they even come up with what the rents are, that kind of thing? Every one of these, there’s always an appraisal of the property. Can’t do a waiver on something like this. And they do both the normal appraisal and they do a rent schedule to show the market rates. Then they take 100% of that rent schedule.
So I have one right now that’s a 1031 exchange where somebody sold a property, they’ve got a big chunk to put down. We’re only going to give them a couple hundred grand on this new purchase. And they’re well above, they’re in this region here where the rent’s going to way more than offset the payment.
And the interest rate on that, everything else works out to be pretty close to where our normal 30-year fixed rate is. They’re slightly higher, of course, but they’re totally doable, and that can help you get a deal done.
So, think about this on any listings that you want to promote to someone that would be an investor, or if you do have buyer investors, this is just a no-brainer for them.
So, if you have questions on this or anything else, please reach out. I’m never too busy to help. Thanks so much for watching, and we’ll talk to you soon. Take care.
