Hard Money Rental Loans
Build a portfolio of passive income
DSCR Loan Interest Rates
30- year fixed DSCR Loan for stabilized rental properties
Loan To Purchase Price
up to 80%
Loan To Value
up to 80%
30-yr fixed rate
Minimum Loan Amount
Maximum Loan Amount
Type of Property
Residential 1-4 units
What Is A DSCR Loan?
A Debt Service Coverage Ratio loan or DSCR loan is geared towards real estate investors and is based on the property’s cash flow to cover the debt, instead of the real estate investor’s personal finances. The debt service coverage ratio is used to determine whether the property’s net operating income will cover the debt that is owed. This includes the principal amount of the loan, as well as the interest.
DSCR rental loans are essentially focused on the property’s income generating abilities, in comparison to the amount of debt that is owed. If the potential income from the property is able to cover the debt and more, then the loan is likely to get approved. So, the higher the DSCR, the less risk for the lender and the more chance the loan will be approved.
DSCR Loan Interest Rates
DSCR loans can have a higher interest rate than conventional loans, however in some cases DSCR loan rates can be the same. It varies according to the lender and the borrower’s DSCR. According to OfferMarket, the current average DSCR loan interest rate is between 7.20% and 8.57%. This was determined on 27 October 2022 and is applicable to 30-year fixed loans with a 25% down payment, where the DSCR is 1.2.
In comparison, conventional loans have an average interest rate of about 7.24% currently, according to Bankrate. This means that the difference between the DSCR loan rates and conventional loan rates isn’t very large. DSCR loan rates vary from lender to lender and are based on a combination of factors.
DSCR loan rates are determined by the following factors:
Do You Need A Down Payment For A DSCR Loan?
DSCR loans typically require a down payment contribution from the real estate investor of anywhere between 20% and 25%. This can depend on the Loan-To-Value (LTV) ratio as well. For example, if the LTV is 80%, then the down payment required would be at least 20%.
Some lenders may require a larger down payment for real estate investors who have no previous real estate investing experience, or for borrowers with a DSCR that is lower than 1. A ratio lower than 1 means that the income from the property may not fully cover the debt that is owed.
A higher down payment than conventional loans is required because the risk on rental properties is typically higher. Tenants can be unreliable and there may be months where there is no rental income, so lenders usually want to make sure that the down payment covers a large portion of the loan upfront.
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Frequently Asked Questions
DSCR loans have a slightly higher interest rate than conventional loans because they are a riskier type of loan. DSCR mortgage rates are often anywhere between 1% and 2% higher than conventional loans. This is due to two main reasons:
- Rental property is viewed by lenders as a riskier investment and DSCR loans are based on the income of the rental property being enough to cover the debt. When there are months of no income, this could therefore impact the loan repayments.
- No personal finance information is required, and DSCR loans are based entirely on the property’s income generation to cover the loan. This means that there is no responsibility on real estate investors, and loan repayment hinges on the property maintaining a positive cash flow.
To get a lower DSCR loan rate there are few options:
- Pay a larger down payment
- Choose a property with a higher DSCR
- Look at an adjustable-rate loan
- Use points, if you have enough money
- Improve your credit score
According to Bankrate, as of November 2022, the average rate for a conventional 30-year fixed mortgage is 7.24%. The average loan rate on a 15-year fixed mortgage is 6.46%, while a 5/1 ARM loan is 5.62%. Which means that the average loan rate on a conventional 30-year fixed mortgage is anywhere between 0 and 2% lower than the average DSCR loan rate.
Debt Service Coverage Ratio is a key indicator of an investment or business’s ability to generate sufficient income to repay debt. It is measured by taking the net operating income (NOI) of a property, for example, and dividing it by the total debt that needs to be serviced. This formula works off the annual amount of debt that needs to be covered.
DSCR is a ratio used by many lenders to show whether a property will produce enough income to cover the loan repayments. A DSCR of 1, means that the investment will generate enough income to cover 100% of the debt, but there will be no funds left once the debt has been paid.
DSCR loans are offered by a variety of lenders such as banks, credit unions, private lending companies and mortgage companies. To find direct lenders you can look online for private lending companies, or you can go via companies that will help you find the best lender for DSCR loans. You can also consult with other real estate experts or attend real estate investors’ networking events to find lenders that are recommended by others in the industry.
Once you’ve found some options, you can explain your situation to them in terms of the real estate deal that you’ve found and the type of loan you’re looking for. They will be able to assess your case and then let you know if they have a DSCR loan to suit your needs. Once you’ve found the right lender who can provide the most well-suited loan, you can begin the application process.
Yes, there are traditional lenders who provide DSCR loans. However, private lending companies are generally more likely to provide these loans as they are willing to take on the higher risk and be more flexible with loan terms. Whichever lender real estate investors choose to go with, it’s important to make sure that the DSCR is above 1.2, as most lenders will need the ratio to ensure that the property’s income is going to cover the loan repayments each month, and then some.
A DSCR Loan is a unique loan product designed specifically for real estate investors. The cash flow status of the rental property is incorporated into the loan terms. It is very well suited to rental property investors.