Down Payment Requirement for DSCR Long Term Rental Loans

When financing the purchase of a rental property, lenders will not fund more than 80% of the purchase price. So the minimum down payment you’ll need is 20% percent. The down payment needs to be liquid funds in your bank account. No lender will consider seller financing, gap funding or other creative financing strategies for term rental loans.

What if the purchase is below market value?
Lenders consider your purchase price to be the value, so you can’t get 100% financing, or anything higher than 80% loan-to-purchase price.

Your Credit Score May Affect the Down Payment

While 20% is the minimum down payment, many investors will have to contribute more than that to the purchase. Some lenders adjust the maximum loan-to-purchase price according to the borrower’s credit score. For example, a credit score of 720 could mean the lender won’t fund more than 75% percent of the purchase price, and the investor’s minimum down payment would be 25%. A credit score of 650 could put the maximum at 70% which means a 30% down payment would be required.

An investor with a credit score less than 620 will have a very difficult time finding a lender to fund their long-term rental loan. With short-term bridge or rehab loans, the FICO score is not a deciding factor for many lenders. But in long-term rental financing, the credit score is extremely important, and lenders cannot make exceptions.

DSCR is What Really Determines the Down Payment

While the location and credit score are significant elements in determining the maximum leverage for a long-term rental loan, the most important factor is the DSCR, which stands for debt service coverage ratio. It’s a calculation of the subject property’s monthly rental income against the total of the monthly expenses, which includes the mortgage payment, taxes, insurance AND homeowner association dues if applicable.

We’ll write a separate guide to explain the calculation in detail, but focusing on the down payment requirement, just realize that if the calculation result is less than 1.0, 1.25, or whatever the lender’s minimum ratio is, the lender will lower the loan amount which means you’d have to increase the down payment.

How to Reduce the Down Payment for Rental Investments

If you’re looking to acquire a residential rental property with a lower down payment of only 10% or 15%, the only way that’s possible is if the property needs to be renovated, and the value increases significantly after the work is completed.

It would have to be two separate loans. One for the purchase and renovation for a term up to 12 months, then the DSCR rental loan can refinance the short-term loan when the property is ready to be occupied by a tenant. Many of the private lending companies listed on our website offer both short-term and long-term financing to real estate investors.

Common Traits for DSCR Long-Term Rental Loans

  • Loan terms range from 5 to 30 years
  • All lenders charge a prepayment penalty, at least 18 months
  • No rural areas
  • Rental can be leased annually, or a nightly vacation rental
  • Seasoning not typically required
    • Meaning the property does not need to have been rented for a certain number of months
    • Property can be vacant, but it must be move-in ready when you apply for the loan
    • Lenders can estimate the rental income

How to Find Direct Lenders for Long-Term Rental Loans

Option 1: Browse Lenders
Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, rates, fees and much more. Make contact with each out directly. Send an email, call, or visit their websites.

  1. Start at the Long-Term Rental Lenders page
  2. Type in a state or major metro area, and click SEARCH
  3. Click REFINE RESULTS in the Filters section if needed
  4. View each lender’s profile to learn about their guidelines, pricing and more
  5. Click the green CONTACT button and reach out to the lender directly

The companies listed pay us a monthly advertising fee, so there is no cost to make contact with them directly. Please remind each company that you found them on PrivateLenderLink.com.

Browse Lenders 

 

Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.

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Interest Rates for DSCR Long-Term Rental Loans

While attending the IMN Single Family Rental Conference, we interviewed Jeffrey Tesch, CEO of RCN Capital, to get more insights about how the interest rates for these rental loans are determined, and what the typical rates are. RCN is one of the largest private lending companies in the country, and one of the top originators of long-term rental loans.

Interest Rate Range for 30-Year Rental Loans in 2021

  • 3.75% to 5.0%

Factors That Determine the Interest Rate for Rental Loans

  • Debt Service Coverage Ratio
  • Borrower’s Credit Score

Long-term rental loan rates move similarly to consumer mortgages since the majority of them are sold to the secondary market and securitized. While the interest rates for DSCR rental loans for RCN Capital and other lenders range from 3.75% to 5% as of December 2021, many people in the private lending industry expect the Federal Reserve to increase the Fed Funds Rate in early 2022.

How to Find Direct Lenders for Long-Term Rental Loans

If you’re seeking long-term financing for a residential rental property, use our website as a resource. There is no fee to search, and we have a select group of reputable private lending companies listed.

  1. Start at the Long-Term Rental Lenders page
  2. Type in a state or major metro area, and click SEARCH
  3. Click REFINE RESULTS in the Filters section if needed
  4. View each lender’s profile to learn about their guidelines, pricing and more
  5. Click the green CONTACT button and reach out to the lender directly

The companies listed pay us a monthly advertising fee, so there is no cost to make contact with them directly. Please remind each company that you found them on PrivateLenderLink.com.

Bridge Loans for Luxury Homes & Mansions

There could be multiple ways to define a “luxury home”, but for the purpose of this guide, we’ll consider it to be a home with a value several times higher than the average home value in a particular market. It’s not only mega-mansions with thousands of square feet, because a penthouse condo in a big city could be considered a luxury home. So let’s focus on the dollar amount.

Most private and hard money lenders that lend on residential investment properties will max out at a loan amount of $2,000,000. However, there are a few private lending firms out there that can lend up to $5 million, $10 million, or even $20 million dollars on a luxury home.

Challenges for Financing Luxury Homes

The biggest hurdles for providing bridge loans for luxury residential properties are occupancy and valuation.

Must be Non-Owner Occupied

Private hard money lenders only lend on investment properties, and it’s not common for someone to own a luxury home that’s a rental property. It’s typically a primary residence, in which case private lending is not possible.

There are two exceptions in California:

  • Transitional Bridge – the borrower is using equity in their current home to buy another, and they plan to sell the departing residence shortly after the closing
  • Business Purpose Cash Out – the funds will be used for a business or investment purpose.

For all other states, the home must be vacant, tenant-occupied, or a furnished short-term rental.

Valuation and Loan-to-Value

The valuation is another challenge. Luxury homes are typically very unique and difficult to appraise. If the borrower thinks a home is worth $10,000,000 and they want a 70% loan-to-value, that’s not realistic. Even if the appraisal ends up at $10M, the lender would likely be very conservative with such a unique property and may max out at 60-65% LTV. The reason for this is luxury homes are not easy to sell.

Luxury homes may be selling like hotcakes in a strong market as we had in early 2021, but when the housing market softens, luxury home values fall harder than all other asset classes. Lenders are always thinking about the worst-case scenario of having to go through foreclosure and owning the property. If that happens, lenders will typically sell the foreclosed property as soon as possible, and a luxury home could be difficult to sell.

Typically Pricing for Luxury Home Bridge Loans

The pricing for private financing on luxury homes is similar to bridge loans for any other property type. As of mid-2021, the interest rates range from 7% to 10% interest, plus 1 to 2 points for the origination fee. The maximum loan term is typically 2 years, and the borrower must have a clear exit strategy to pay off the loan.


Scenarios for Luxury Home Bridge Lending

The following are a few common scenarios for private lending on luxury homes and mansions.

Equity Cash Out for Renovations Prior to Sale

When a luxury home is being prepared for a sale, the owner may need to pull some equity cash out to use for major renovations prior to putting it on the market. A short-term equity cash out bridge loan can be a good solution to pay for the renovations. Lenders love this scenario because of the clear exit strategy, knowing the loan will be paid off with a sale.

The challenge with equity cash out loans is most private lenders won’t consider a 2nd position mortgage. So if there is an existing 1st mortgage on the home, it would have to be refinanced. If the home is in California, there are quite a few lenders that offer 2nd mortgages.

Refinance Another Private Mortgage

Some owners of luxury homes frequently use private/hard money financing and may have to seek a refinance of a bridge loan that is maturing, in cases where the lender is not willing to extend the loan term. Another private lender may consider a refinance without any cash out, so long as the loan is in good standing with no late payments. Lenders still want to see a solid exit strategy other than refinancing with another private lender.

Purchase by Foreign National

People from all over the world love to park their money in U.S. real estate, mostly in the coastal metropolitan cities like New York, Los Angeles, Miami, San Francisco, Washington DC, Seattle, Boston and many others. Private hard money lenders are typically fine with lending to non-US citizens, and many don’t require a personal guarantee. To off-set the risk, the lender will likely ask for a larger cash down-payment, perhaps 50% of the purchase price.


How to Find Lenders for Luxury Homes

You can find direct private hard money lenders right here on our website, and we have filters you can use to easily find out which lenders consider luxury homes.

  1. Start at the Find a Lender page
  2. From the Loan Type list, select either Private Money, Hard Money, or Residential Bridge. All of them will have similar results.
  3. Type in a state or major metro area, and click SEARCH
  4. Look for the Filters section, click Refine Results, then enter the loan amount. This is the primary filter for luxury home loans.
  5. View each lender’s profile to learn about their guidelines, background and more
  6. Click the green CONTACT button and reach out to the lender directly

Another way to find more lenders is to switch to the Commercial Bridge Lender category. Several lenders on our platform are focused on commercial real estate, so we don’t put them in the residential categories, but a few of them will consider luxury homes if the loan amount is over $2,000,00. But you must use the property type filter to select Single Family Residence.

Please remind the lenders that you found them on PrivateLenderLink.com.