Are you a real estate investor looking to refinance or grow your existing real estate business in the Smoky Mountains? If you recently purchased a vacation rental property and got declined for DSCR financing, don't worry, there are other options available. In this blog post, we'll discuss what to do when you don't qualify for DSCR financing and how a cash-out refinance could be the solution to your problem.
Understanding the Problem: DSCR Financing
Debt service coverage ratio (DSCR) is a common way lenders evaluate the risk of lending to a real estate investor. DSCR is calculated by dividing the net operating income (NOI) by the total debt service, including principal and interest payments. Typically, lenders require a minimum DSCR of 1.2 to 1.5 for a loan to be approved.
However, DSCR financing is not always available for vacation rental properties, especially if you don't have a long enough track record or don't meet other requirements. In Trina's case, she purchased a cabin in the Smoky Mountains and got declined by a DSCR lender because she didn't have 12 months of seasoning or didn't qualify based on her long-term rents. So, what are her options?
Exploring Alternative Financing Options
Trina could consider a no-ratio program, which is asset-based and doesn't require a minimum DSCR. However, these loans come with a prepayment penalty of up to three years, which could be a significant cost if you plan to pay off the loan earlier. Another option is a stabilized bridge loan for rent-ready properties, which requires six months of seasoning and can be used for a cash-out refinance. This type of loan can be a good solution for the short-term, but you will need to find a long-term refinance option later.
Cash-Out Refinance: A Long-Term Solution
If you're looking for a long-term solution for your vacation rental property, a cash-out refinance could be a good option. This type of loan allows you to refinance your property and take out some of the equity in cash. The cash-out refinance can be used to pay off your investor, make improvements to your property, or invest in other real estate projects.
To qualify for a cash-out refinance, you will need to have a good credit score, a stable income, and enough equity in your property. In Trina's case, she has owned her cabin for seven months, and the appraised value is higher than the purchase price and rehab cost. Her credit score is also good, so she meets the requirements for a cash-out refinance.
If you're a real estate investor in the Smoky Mountains and don't qualify for DSCR financing, don't despair. There are other financing options available, such as a no-ratio program or a stabilized bridge loan for rent-ready properties. However, if you're looking for a long-term solution, a cash-out refinance could be a good option. Make sure you meet the requirements and have a solid plan for using the cash-out funds. As always, it's a good idea to talk to a real estate financing expert to help you evaluate your options and make an informed decision.