DSCR Loans are based on the property’s Debt Service Coverage Ratio.

DSCR loans, or Debt Service Coverage Ratio loans, rely on the gap between the loan payment and rental income. This difference represents the landlord’s gross profit. These loans offer extended terms and are structured around continuous payment streams. People commonly utilize DSCR loans for two primary purposes: acquiring ready-to-go properties or refinancing for a cash-out option on their existing real estate holdings. Rate and term financing is available too, but usually only used when rates decrease substantially like they’re beginning to now.

No personal income or tax returns are needed, and you’ll never sign a 4506.

A DSCR Loan is a special mortgage for homes that make money. Instead of looking at your income, like with a home you’d buy for yourself, it focuses on how much money the property can make.

They’re great for real estate investors who want to grow big (no more need for paycheck proof!) or want to skip the hassle and paperwork of regular loans. DSCR Loans are becoming popular among real estate investors.

Who are DSCR Loans For?

DSCR Loans are tailored for investors who want to profit from rental properties, making them an excellent choice for a wide range of situations. Whether you’re just starting out as a real estate investor or an experienced pro aiming to grow your portfolio, DSCR Loans are versatile and can work for you. What makes DSCR Loans particularly attractive is their flexibility and straightforward qualification process. Unlike traditional financing, which must adhere to strict rules set by agencies like Fannie Mae and Freddie Mac, DSCR Loans offer a more accommodating path to property investment success.”

DSCR Loans are generally a great loan option for:

Self Employed people looking to invest in real estate.

People who invest in real Estate with partners.

Investors looking for short term rental investments.

Terms For Rental Property Loans

Most commonly DSCR loans are 30 years in length at fixed interest rates used either as a purchase loan, rate and term DSCR refinance or cash out DSCR refinance. Some people even use them as delayed purchase loans, which is when the buyer acquires the property with cash, usually to prevent it from selling to someone else, then refinancing it with a DSCR loan.

There are a lot of other variables and options available with these loan types too and they actually range in length from 17 to 40 years as of this writing. (Term options may change so inquire with us for the latest updates).

You can also get rental property loans with adjustable rate mortgages or ARMS which is one way to reduce upfront costs but does leave the borrower susceptible to increased rates later on.

Another popular option, especially when using a cashing out loan on a rental property, is using an interest only DSCR loan (often referred to as an IO DSCR loan) where only interest and no principal is paid for the first 10 years or less, depending on what the borrower chooses. This is one way to maximize cash flow by keeping payments low for a long time. Savvy investors often use this strategy so they can continue to invest in more real estate.

Prepayment Penalties

Except in a few states where it’s not legal, DSCR loans typically have a prepayment penalty of 5 years, although this can be paid down with additional points by the borrower to 4, 3, 2 or 1 year.

If the landlord plans on holding the property for 5 years or more, there’s no benefit in reducing the prepayment penalty on a DSCR loan. This is generally only useful for borrowers who plan on selling the property within a few years or aren’t sure what they’ll do with it.

Another important thing to understand about prepayment penalties is that they decrease in size each year, so paying them down at the time of closing the loan is less important even for investors who aren’t certain what their long term strategy will be.

Generally, the prepayment penalty is setup as a 5/4/3/2/1 which means if the property was sold or refinanced in the first year, the borrower would pay 5% additional interest on the remaining balance, then 4% in the second year, 3% in the third year and so on.

Qualifying and Credit Scores

Unlike true private money, often referred to as hard money, DSCR loans are a bit different.

They are generally categorized as institutional loans, which means they follow guidelines of approval similar to retail loans for owner-occupied properties. Where private lenders can set their own rules and guidelines for lending on properties, this is less so the case with rental property loans.

There are still low-doc options for lending approval but they are not asset-based in the truest sense of the word as you may find with a fix and flip loan, rehab loan, construction loan or bridge loan.

While we often have options for lower FICO scores, the best options, just as if you were buying your own home to live in, will be available for borrowers with scores of 700, although plenty of good options exist for mid-600 scores and even some options for scores in the lower 600’s.

Generally, the lower the FICO score, the more down payment will be required on a purchase or in other words, the LTV (loan to value) would be less. The same would be true for rate and term refinances and cash out refinances.

The best options as of the publishing of this article offer 85% LTV (or 15% down) on a DSCR purchase and 80% LTV on DSCR cash out and DSCR rate and term refinance.

Seasoning Requirements For Refinancing

Seasoning refers to how long someone has owned a property. When refinancing, with either a rate and term or cash out loan, can have a major impact on what’s available.

Generally speaking, it’s best to have 3-6 months of seasoning before applying for a DSCR refinance.

The one exception being a delayed purchase, where the borrower has already purchased the property with their own cash and now wants to finance it. Since the property is already owned free and clear at this point, with no other lien or loan on it, seasoning is not required

If a rehab has been done, and now the owner is transitioning it into a rental they’ll continue to own, it’s also recommended that that property is already rented for the best rates and terms. The borrower will generally have to show proof of what was done curing the rehab. The key reason being to prove both the assumed increase in value since purchase due to the repairs and improvements plus that it’s ready for renting and inhabitable.

A refinance is available to inhabitable properties with less than 3-6 months even if there is a current loan on the property, such as a fix and flip, bridge or rehab loan, but in most cases, the LTV will be based on the purchase price rather than the post-rehab value, which could be substantially different meaning less money lendable to the borrower. Unless there is a need for immediate cash flow, this is not the best approach.

Other Costs Of DSCR Financing

A lot of borrowers mistakenly think they need just the amount of money for the down payment if purchasing, but this is rarely the case. There will always be various closing costs for processing the loan, appraisals and some other fees that will need to be covered, usually amounting to around 3-5% of the total loan amount plus the borrower needs to prove they have liquid assets available that amount to 3-6 months of loan payments. Borrowers won’t get approved without this.

DSCR Refinances of both types, cash out and rate and term, can usually be closed with no out of pocket costs. There are still closing costs as with a purchase, but they are just rolled into the loan and the amount given as cash out or as a refinance is reduced by the cost of these fees.

Property Location Considerations

Location is another factor that should be considered when buying a rental property. While there are options for rural properties, generally the LTV on these will be lower than suburban and urban properties. The best way to determine if a property is considered rural or not is to check the address in both of these government based websites listed below, but if the property is located in a city with less than 35,000 people, it’s usually going to be considered rural.

https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfhprev

https://www.consumerfinance.gov/rural-or-underserved-tool/

DSCR Ratios Explained

This is an important number to keep in mind and will factor heavily into the LTV a borrower will get approved for.

A DSCR ratio is basically a metric of cash flow. Ideally a property will have cash flow in excess of 20% of the cost of its debts, which includes the monthly cost of any liens or loans and all other expenses to maintain the property. In a perfect scenario, a DSCR ratio would be 2.0, which is rare, but with 1.2-1.4 ratios, this is usually enough to satisfy the requirements to receive the best LTVs and rates.

Yet there are still options for break even ratios of 1.0 or even loss ratios of less than 1. LTVs and rates on DSCR loans with a ratio of 1 or less will not be as favorable, but many borrowers want to take advantage of increased home values with plans to sell the property in the future when its value has increased significantly, making this upfront loss a win in the long run.

To calculate this ratio you can use our website’s calculator or just divide the net operating income by the total debt.

Lenders acquire these numbers in one of two ways: By using market rents or by actual rents.

The difference between the two can have an impact on what the borrower gets for their terms. Market rents is an estimate of what the property will be able to be rented for and actual rents are based on rents from tenants currently in the property. It’s perfectly acceptable to use market rents if the property is vacant at the time a loan is procured, but it’s always better to use actual rent amounts if available.

What documents are needed for a DSCR Loan?

Application: This is a document with basic details about you and the property. We will walk you through this.

Credit Authorization: Typically the lender will run a credit report.

Leases: If the property is leased you will provide the leases to show the rental income

Short term Rental History: If the property is used for a short term rentals (VRBO, Air BNB, Vacasa for example) and there are 12 months of operating history available typically that is provided by the property manager or booking platform.

Insurance: Property insurance is required with the lender’s information included.

Entity documents: If you are borrowing through a vehicle such as an LLC you will need to provide those documents (Certificates of Good Standing, Certificate of Formation, Articles of Organization and Operating Agreement)

Renovation documents: For rehab properties typically these items from the renovation will be required (Receipts, Invoices, Work Orders).

Also required and collected by the lender will be: 

Appraisal Report
Appraisal Review
Title Insurance

You will notice the absence of personal tax returns and employment verification. DSCR loans are about the property and the project.