DSCR Loans: The Investor’s Guide to Property Financing

DSCR Loans

Are you a real estate investor looking for a sweet spot where cash flow and opportunity meet? DSCR loans (Debt-Service Coverage Ratio) may be suitable for you. These mortgages are all about properties making enough rent to pay for themselves.

This type of loan no longer looks at your finances to close deals. Instead, it focuses on how well the property is doing. This means investors like you can grow your portfolios without worrying about income requirements.

In this guide, we’ll explore the intricacies of DSCR loans, explaining how they work, their benefits, and how to determine if they are the right fit for your investment strategy. 

By the end of this post, you’ll clearly understand how DSCR loans can help you maximize your investment returns and achieve your financial goals.

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Key Takeaways:

  • DSCR loans prioritize rental income from the property rather than the borrower’s personal income or credit score, making them ideal for investors focused on cash flow.

  • To qualify for a DSCR loan, properties should have a DSCR ratio of 1.2 to 1.5, a credit score of at least 660, and documented rental income and expenses.

  • These loans suit various properties, including residential, multi-family, mixed-use, and commercial properties with stable rental income.

  • Applying for a DSCR loan requires documentation of income and expenses, a good credit score, and a significant down payment, usually around 20%.

  • Enhancing your property’s DSCR by improving rental income and managing expenses is crucial for securing favorable loan terms and rates.

What is a DSCR Loan?

DSCR loans, debt service coverage ratio loans, are real estate financing that qualifies borrowers based on the property’s income-generating potential rather than their personal income or job situation.

If your property pulls its weight in rental income, you’re already halfway through the door. With a DSCR loan, they care more about how much cash your property brings than your credit score.

This means lenders care more about the steady rental income you receive monthly than how much money you have in your pocket. You’ll likely get the mortgage if the rent covers your loan payments and leaves extra cash.

In my 20 years as a real estate professional and commercial mortgage broker, I have learned that DSCR loans are essential for real estate investors’ growth. These loans use cash flow to pay down mortgages on investment properties, whether purchases or cash-out refinances. 

-Terence Young

How DSCR Loans Work?

DSCR loans assess how much money a property makes compared to what it owes. Lenders check whether the incoming money is enough to pay the monthly mortgage and other costs.

These loans are usually used for commercial real estate investments such as residential, multi-family, and commercial properties that consistently generate steady rental income.

DSCR Loan Rates

As of May 2nd, 2024, DSCR loan rates range from 7.500% (with an APR of 7.741%) to 9.250% (with an APR of 9.413%). But don’t worry; these rates can vary based on key factors:

But don’t worry, these rates can vary based on key factors:

  • Your DSCR ratio (how much rental income you’re bringing in)
  • How much you’re putting down
  • Your credit score
  • Length of the loan term

These are the factors used to determine the final rate you’ll get for a DSCR Loan.

Lenders will check your Debt Service Coverage Ratio (DSCR) to determine whether you own other properties that affect your performance. To determine your DSCR, divide your property’s net operating income (NOI) by the mortgage payment.

DSCR Loans equation

If the DSCR ratio is over 1, the property’s income covers its debts and gets a chance for loan approval. In able for you to identify your DSCR Ratio quickly, you can also use this calculator:

If the DSCR ratio is over 1, that means the property’s income covers its debts, and get a chance for loan approval. In able for you to identify you DSCR Ratio easily, you can also use this calculator:

DSCR Loan Calculator

DSCR Calculator

DSCR Calculator






What is good DSCR Ratio?

good Debt Service Coverage Ratio (DSCR) is typically between 1.2 and 1.5. This means the property’s income exceeds its debt obligations by 20% to 50%. Most lenders like higher DSCR ratios because they show things are looking good financially, and there’s less chance of things going south.

The ideal DSCR can vary depending on the lender’s criteria, the type of property, and the economy’s performance.

How to Qualify for DSCR Loans?

To qualify for this loan, lenders tend to require specific criteria to get approval:

Loan Requirements

Typical requirements include:

  1. A good Debt Service Coverage Ratio (DSCR) of at least 1.2 to 1.5.
  2. A decent credit score, usually 660 and up.
  3. Documentation of rental income and expenses.
  4. Cash reserves are equivalent to several months’ mortgage payments.
  5. A minimum down payment of around 20% for a purchase.
  6. A minimum loan amount from $100,000 to $50 million.

Meeting these requirements shows the lender you can repay the loan on time, increasing the likelihood of approval for a DSCR loan.

Property Eligibility for a DSCR loan

You must meet specific property eligibility criteria for approval for a DSCR loan. Here are the eligibility criteria typically included for obtaining a DSCR Loan:

  1. Stable Rental Income: The property should have positive cash flow to cover the loan payments and expenses.
  2. Property Type: Residential investment properties, multi-family, mixed-use, and commercial properties.
  3. Property Condition: The property must be in good shape and be up to code.
 
Key Takeaway: If you want a DSCR loan, here’s the deal: having a solid rental income to debt ratio is super important, and having a good credit score can help you get better terms.

DSCR Loan Pros and Cons

DSCR loans are the latest trend in real estate financing. What makes them unique? They prioritize cash flow over personal income. Now, let me walk you through the DCSR loan pros and cons.

DSCR Loan pros and cons Infographic

DSCR loans can be a great choice for investors with properties bringing in cash. But think about the good and the not-so-good, what you aim for financially, and how much risk you’re comfortable with.

How to Apply for a DSCR Loan

Here’s a guide for the application process:

How to Apply for a  DSCR Loan Infographic

Property That Qualify For DSCR Loans

DSCR Loan for Rental Property

DSCR loans are well-suited for financing vacation and short-term rentals for residential properties, such as those listed on VRBO or Airbnb. These properties can generate a lot of income, as travelers frequently book them and can command higher prices, particularly in popular travel destinations.

Investors can use the rent they expect from a property to snag a DSCR loan. This allows them to acquire more rental units without relying too heavily on their income or jobs.

DSCR Loan for Commercial Property

DSCR Loan for Commercial property, offer financing for office buildings, shopping malls, and apartment complexes. With these loans, investors can snag financing based on the property’s rental income, not their financial stats.

FAQs in Relation to DSCR Loans

Do DSCR loans come with high interest rates?

DSCR (Debt Service Coverage Ratio) loans typically have slightly higher interest rates than traditional loan due to the increased risk for lenders. Still, they are often more favorable than hard money loans.

The exact rate can vary based on the borrower’s creditworthiness, the property’s income potential, and market conditions. Always compare offers from multiple lenders to find the best rate available.

What is a DSCR Mortgage Loan?

A DSCR mortgage loan is like a mortgage that looks at how much money the property makes from rent compared to what it has to pay for the mortgage and other expenses.

How to Qualify for a DSCR Loan?

To get a DSCR loan, you usually need a DSCR between 1.2 and 1.5. It advisable to have a credit score of 660 and up. Plus, you’ll need to prove your rental income, expenses, and savings and put down a minimum of 20% on purchases.

Where Can I get a DSCR Loan?

Banks, credit unions, and specialized mortgage companies like eFunder can set you up with DSCR loans.

Can I refinance a DSCR Loan?

You can refinance a DSCR loan to snag lower interest rates, get more cash, or tweak the loan terms if you meet the lender’s current DSCR loan requirements.

DSCR Loans eFunder Loan Program

Conclusion

So, in a nutshell, DSCR loans are all about looking at the money coming in from the property, not just your paycheck. Having a solid debt service coverage ratio can be your key.

Reasonable rental projections and a decent credit score determine your approval. Remember that documentation is vital, so gather those financials with care.

Also, prepare for some trade-offs because while you find these loans flexible, they come with their own rules. Before diving in, weigh the benefits against potential limitations as well.

To improve your performance, focus on beefing up your debt service coverage ratio. Trust me, making your property perform better is crucial, which could lead to more favorable loan terms.

In this journey through DSCR loans, you’ve got tools for smarter investing—one where cash flow leads and opportunities follow.

If you need a DSCR loan, look no further! Click here to schedule a free consultation at eFunder, or fill out this form for a quote. 

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Some of the links in this article may be affiliate links, which can compensate us at no cost if you decide to purchase. This blog is not intended to provide financial advice.

Picture of Terence Young
Terence Young

Founder of eFunder

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