When you are financing an investment property using a DSCR loan, it is important to prepare for more than just the monthly mortgage. One major aspect investors often overlook is DSCR loan closing costs. These upfront fees can impact your budget and cash flow, especially if you are managing multiple properties or working with tight margins. Understanding DSCR loan closing costs early can help you plan more effectively and avoid surprises at the closing table.
DSCR loans offer flexibility by focusing on property income instead of personal income. However, this convenience can come with higher closing fees. This guide will walk you through what to expect, how to estimate costs, and how to manage your expenses more effectively.
What Are DSCR Loan Closing Costs?
DSCR loan closing costs refer to all the fees and expenses paid when finalizing a real estate loan. These are separate from your down payment and may include charges from the lender, third-party vendors, and government agencies. In most cases, these costs fall between three percent and six percent of the loan amount.
For example, if your loan is five hundred thousand dollars, closing costs could range from fifteen thousand to thirty thousand dollars. These fees are paid upfront and must be accounted for when planning your investment.
Why Are DSCR Loan Closing Costs Often Higher?
DSCR loans are designed for investors. Because the approval is based on the property’s income, lenders accept more risk. To offset this, they usually charge higher fees during the closing process. Many DSCR loans are offered by private or non-bank lenders that do not follow the traditional lending model, so they create their pricing structure.
These loans are not insured or backed by government programs like FHA or VA loans. As a result, investors should expect more flexibility but also higher closing costs. Understanding this cost structure early can help avoid surprises later.
Typical DSCR Loan Closing Cost Breakdown
Although costs may vary depending on your lender and location, most DSCR loans include the following closing fees:
Origination Fee
Lenders charge this fee to process and set up the loan. It is usually between one and three percent of the loan amount. On a four hundred thousand dollar loan, this could cost you four thousand to twelve thousand dollars.
Underwriting Fee
This fee covers the cost of evaluating the loan application. It usually ranges from five hundred to fifteen hundred dollars.
Appraisal Fee
The lender will hire an appraiser to evaluate the property’s market value. This fee can range from four hundred to eight hundred dollars. Properties like short-term rentals or multifamily units may cost more.
Title Search and Title Insurance
These protect against any disputes over property ownership. Combined, these can cost five hundred to one thousand dollars depending on the region.
Credit Report Fee
Even though DSCR loans rely on the property’s income, many lenders still review your credit report. The cost for this is generally between fifty and one hundred dollars.
Recording Fees
Local government agencies charge this to officially register the sale. This can be anywhere from fifty to two hundred fifty dollars.
Escrow Fees
Escrow or closing agents handle documentation and funds during the transaction. These fees typically range between four hundred and one thousand dollars.
Prepaid Items
You may need to prepay certain costs like property taxes, homeowners’ insurance, or interest. These prepaid amounts will vary depending on your location and lender requirements.
Additional Costs
Depending on the lender and property, you may also be responsible for transfer taxes, notary fees, inspection reports, legal fees, or flood certifications.
Sample Closing Cost Estimate
Here is a sample closing cost estimate for a three hundred fifty thousand dollar DSCR loan:
- Origination Fee (2 percent): Seven thousand dollars
- Appraisal: Six hundred dollars
- Underwriting: One thousand dollars
- Title and Insurance: Nine hundred dollars
- Credit Report: Seventy-five dollars
- Recording Fee: One hundred fifty dollars
- Escrow: Seven hundred fifty dollars
- Prepaid Items: Two thousand five hundred dollars
Estimated Total: Between thirteen thousand and fifteen thousand dollars
This example shows why closing costs should always be included in your overall investment analysis.
What Affects DSCR Loan Closing Costs?
Several factors determine how much you will pay at closing:
- Loan Size: Larger loans typically come with higher closing costs, especially those charged as a percentage.
- Lender Type: Private lenders often charge more than credit unions or traditional banks due to fewer regulations.
- Property Type: Multifamily homes, short-term rentals, or commercial properties may require extra inspections or appraisals.
- Property Location: Certain states and cities charge higher transfer taxes, title fees, or insurance premiums.
- Experience Level: Some lenders charge higher fees to new investors, while repeat clients may receive discounts.
Are DSCR Closing Costs Negotiable?
Yes, many of the costs involved in closing a DSCR loan can be negotiated. While not every fee is flexible, some lenders are open to adjustments:
- Ask for a lower origination fee, especially on larger loans
- Compare multiple lenders and request written estimates
- Request lender credits in exchange for slightly higher interest rates
- Bundle services such as title and escrow to reduce duplication
- Ask for closing cost assistance from motivated sellers
Always review the Loan Estimate and Closing Disclosure carefully. If any fee seems unclear or excessive, do not hesitate to ask for clarification or adjustments.
Can DSCR Closing Costs Be Rolled Into the Loan?
Some lenders allow you to roll your closing costs into the total loan amount. This can reduce your upfront cash requirement but may increase your monthly payment. Rolling costs into the loan also affects the loan-to-value ratio and may limit your options for refinancing or resale.
It is best to weigh the short-term benefit of less cash at closing against the long-term cost of a higher loan balance.
Are Closing Costs on DSCR Loans Tax Deductible?
Some closing costs may be tax-deductible, especially for investment properties. The most common deductions include:
- Mortgage interest
- Property taxes
- Certain loan fees (when amortised over the life of the loan)
- Recording or legal fees related to rental income
Always consult with a certified tax professional to understand what qualifies in your situation. Proper documentation is essential if you plan to claim deductions on your tax return.
When Are DSCR Closing Costs Paid?
Closing costs are typically paid on the day the property closes. You will be asked to wire funds or provide a certified check for the total amount due. Some lenders require funds to be submitted one to two days in advance to avoid delays in the closing process.
Make sure you are clear on the total amount due and the payment method expected by your lender or escrow officer.
Final Thoughts
DSCR loan closing costs are an important part of your real estate investment strategy. While the monthly payment gets most of the attention, upfront fees can significantly impact your returns and cash flow. By understanding what to expect and how to manage these costs, you can make more informed decisions and negotiate better terms.
Whether you are investing in a single-family rental or expanding into multifamily housing, always factor in closing costs early. This proactive approach can help you secure better financing, avoid delays, and protect your long-term profitability.
Frequently Asked Questions
How Long Does a DSCR Loan Take to Close?
Most DSCR loans close within twenty one to thirty days. However, this can vary based on the lender and the complexity of the deal.
Can I Use a DSCR Loan for Airbnb Properties?
Yes, many DSCR lenders allow financing for short-term rental properties if the income is strong and consistent.
Will My Credit Score Affect DSCR Closing Costs?
While credit scores are not the main factor in DSCR loan approval, some lenders may adjust your interest rate or fees based on credit quality.
Can I Refinance a DSCR Loan to Reduce Closing Costs Later?
Yes, you can refinance to adjust terms or lower your rate. Just note that refinancing comes with new closing costs.
Do All Lenders Charge the Same DSCR Closing Costs?
No, closing costs vary by lender. It’s smart to compare offers and negotiate where possible.
Introducing Emily Parker, a seasoned professional with over 5 years of expertise in DSCR loans. With her extensive knowledge and experience in the field, Varsha has consistently demonstrated a deep understanding of DSCR loan intricacies and a proven track record of delivering successful outcomes for her clients.
