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.