Debt-Service Coverage Ratio (DSCR) Loan Closing Costs
DSCR closing costs will vary by lender and some are even exempt from initial disclosures. When it comes to mortgages, getting fees in writing is important when:
- Comparing rates and fees associated with the loan.
- Understanding closing costs.
- Using a fees sheet to shop for rates and fees.
Without initial disclosures, there could be a surprise to fees that were not discussed at closing.
Loan Closing Costs Disclosures
Not all lenders disclose traditional loan application documents because they are exempt by law depending on the state. One of the most common forms that breaks down closing costs is called a Loan Estimate. A Loan Estimate will break down costs on page 2 into 7 categories:
- Origination Charges.
- Services You Cannot Shop For.
- Services You Can Shop For.
- Taxes and Other Government Fees.
- Prepaids.
- Initial Escrow Payment at Closing.
- Other.
When a lender says they do not use a Loan Estimate for DSCR loan closing costs, they should be able to provide a Fees Worksheet.
Origination Charges
Origination charges are the fees that will vary most for DSCR loan closing costs. Some of the most common origination charges are:
- Application Fee.
- Origination Fee.
- Underwriting Fee.
- Mortgage Broker Fee.
- Loan Discount Points.
- Processing Fee.
Some lenders will build these fees into the rate – the rate may seem higher in most cases, but it can be a better deal. A rate can either cost money, be at par, or credit a borrower towards closing costs.
Services You Cannot Shop For
These fees are typically very similar when comparing lenders. Examples that would align in this category include:
- Appraisal Fee.
- Credit Report Fee.
- Tax Service Fee.
- Flood Certification Fee.
Services You Can Shop For
These fees are third party fees and will vary depending on the state, city, county, title company and settlement agent. These fees can be issued by the title company – you would have to call them, ask for their email, send them an address, state if it is a purchase or refinance, and the loan amount.
Taxes and Other Government Fees
These fees will not vary much by lender and will depend on the state, city, and county.
Prepaids
Daily interest charges, insurance premiums, and tax installments go in this category depending on when they are due. Insurance can be paid at closing when an invoice is included, and the lender is instructed to include this on the settlement statement.
Initial Escrow Payment at Closing
Three months of insurance and the appropriate amount for taxes are included in this section when an escrow account is not waved.
Other Fees
Owner polices for title insurance go in this category – typically the seller pays this fee at closing unless it is negotiated that the buyer is responsible for this fee.
Advantages and Disadvantages
Advantages:
The biggest advantage to this program is that the loan does not require personal taxable income. Instead, the loan is based on the debt-service coverage ratio, which the equation for calculating this is: Rent / (Principal and Interest (P&I) + Taxes + Insurance + Homeowner’s Association Dues (HOA)) = Debt-Service Coverage Ratio. Some lenders want the rent to cover the mortgage payment, but there are no ratio programs also.
Most lenders allow for unlimited amount of properties financed versus traditional lenders only allowing a maximum of 10 residential units. The DSCR loan also allows:
- The property can close in an LLC versus individual vesting.
- In some cases, it can be a more streamlined process than the traditional route due to less paperwork.
- Financing for commercial and more than 5 units.
Disadvantages:
- Typically, there are higher closing costs than the traditional route.
- Some lenders have slower processing and underwriting times.
- Often comes with pre-payment penalties.
- No owner occupancy options.
- Loan amount restrictions – most lenders will not finance below one hundred thousand.
Traditional Loan Fees Versus DSCR Loan Fees
The DSCR loan closing costs are becoming competitive when it comes to comparing traditional loan fees. Taking the traditional route will have more advantages when it comes to pricing in most cases.