DSCR Loan
Last Updated: 03/24/2024
Loan Highlights
- Investors seeking financing for residential investment properties based on the property’s rental income.
- Strong Debt-Service Coverage Ratio (DSCR) and stable rental income.
- Suitable for investors looking to leverage rental income to cover loan payments and generate cash flow without being capped by personal income.
- Ranges from $50,000 to several million dollars, depending on property value, rental income, and borrower qualifications.
Interest Rate Estimate
Federal Fund Rate + 3% Margin
*The mortgage interest rate calculation above is estimated. The subject borrower for that interest rate is as follow:
- 740 FICO score
- 30 years fixed interest rate
- Investment property
- Single family house
Terms and Breakdown:
- Interest rates: Fixed or can be ARM.
- Loan terms: Typically 15 or 30 years amortized.
- Capped at 80% LTV – Investment (residential)
- Investment property only. Not available as primary residence or second home loans.
Requirements:
- FICO: 660+
- DSCR: 0.74 minimum; preferred minimum: 1.25.
- DSCR required typically ranges from 1.2 to 1.5, indicating the property’s ability to generate sufficient rental income to cover loan payments.
- Strong Debt-Service Coverage Ratio (DSCR) calculated by dividing the property’s net operating income (NOI) by its annual debt service.
- Stable rental income supported by leases, rental history or rental appraisal.
- Property appraisal to determine market value and rental potential.
- Generally requires a larger down payment compared to owner-occupied loans.
- Documentation:
- Typical Documents: No docs beside maybe borrower’ bank statements to show reserves and rental income deposit if applicable
Derivative or Related Products:
- Portfolio Loans (Blanket Loans): Offered by some lenders to investors with multiple properties, providing flexibility in terms and requirements.
- Commercial Loans: For larger residential investment properties or mixed-use properties that may not qualify for traditional residential mortgages.
- DSCR Cash-Out Refinance: Allows investors to refinance existing mortgages and take out additional cash based on property equity and rental income.
Funder and Sponsors:
- DSCR loans are typically offered by banks, credit unions, and specialized lenders catering to real estate investors, with the loan secured by the investment property.
Notes:
- Common misunderstandings with DSCR loans include:
- Underestimating property cash flow requirements: Investors should carefully assess the property's rental income and expenses to ensure it meets the lender's DSCR requirements, considering factors such as vacancy rates, maintenance costs, and property management fees.
- Overlooking property appraisal considerations: Lenders may require a thorough property appraisal to determine market value and rental potential, which can impact loan approval and terms.
- Ignoring documentation requirements: Investors should be prepared to provide extensive documentation of rental income, property expenses, and financial history to meet lender requirements for DSCR loans.