DSCR Loan Requirements
DSCR Loan
30- year fixed DSCR Loan for stabilized rental properties
Interest Rate
from 6.375%
Origination fee
0 - 2%
Loan To Purchase Price
up to 80%
Loan To Value
up to 80%
Minimum DSCR
0.75
Instant Term Sheet
Yes
Term
30-yr fixed rate
Minimum Loan Amount
$150,000
Maximum Loan Amount
$3,000,000
Minimum FICO
660
Type of Property
Residential 1-8 units
Short Term Rentals
Yes
What Is A DSCR Loan?
Debt Service Coverage Ratio loans are based on a business’s ability to generate enough rental income in their cash flow to cover the loan repayments. ‘Debt service’ refers to the total amount of money that is needed by a business to pay back the debt it has incurred. Debt Service Coverage Ratio is the ratio of cash that is available to cover the debt that needs to be paid.
A DSCR loan is aimed at assisting real estate investors who would like to get a loan for their real estate investment. A positive cash flow is a key element to these loans, as the property’s income needs to cover the loan repayments and more, to qualify. A DSCR loan is therefore based largely on the DSCR ratio, and the higher that ratio, the less risk for lenders and the better chance an investor has of getting approved for the loan.
DSCR Loan Requirements
| Qualification | Guideline |
|---|---|
| 1. Loan-to-Value (LTV) Ratio | Up to 80% |
| 2. Debt Service Coverage Ratio | None |
| 3. Maximum Loan Amount | Up to $3,000,000 |
| 4. Credit Score | 660 Minimum |
| 5. Property Type and Use | Residential / Commercial |
| 6. Loan Types | Adjustable Rate / Fixed Rate |
| 7 Number of Properties Owned | No Minimum |
| 8. Prepayment Penalties | Yes (If Applicable) |
You can easily apply for a DSCR Term Sheet online. Your application won’t affect your credit score.
1. Loan-to-Value (LTV) Ratio
Usually, lenders will accept a Loan-To-Value (LTV) of 75-80% of the investment property’s value. Which means that real estate investors would be looking at a down payment of 20-25% of the property’s purchase price. Usually the larger the down payment, the smaller your monthly repayment amounts will be.
2. Debt Service Coverage Ratio
The key requirement for DSCR loans is the debt service coverage ratio. This will show lenders exactly how much of the debt can be repaid by the rental income that the investment property is generating. Most lenders will require a DSCR of 1.1 to 1.5, which means that the property’s income will cover the operating expenses and the loan repayments, with money to spare.
That being said, some lenders like New Silver don’t have a minimum DSCR. Instead, they place greater importance on the investment property and the FICO score of the borrower.
3. Maximum Loan Amount
DSCR loans will generally have a maximum amount of around $3,000,000, but some DSCR lenders may even provide funding up to $5,000,000. The maximum loan amount provided by the lender will hinge on the investment property’s debt service coverage ratio.
4. Credit Score Requirements
While DSCR loans primarily focus on a property’s income-generating potential rather than the borrower’s personal finances, creditworthiness remains a crucial factor in the approval process. Most lenders require a minimum FICO score of 660 to qualify for a DSCR loan. However, this threshold can vary depending on the loan-to-value (LTV) ratio; for instance, a higher LTV of 80% may necessitate a credit score of 700 or above. A strong credit score not only enhances the likelihood of loan approval but also positions the borrower for more favorable loan terms, such as lower interest rates and reduced down payment requirements.
It’s important to note that while some lenders might accept credit scores lower than 660, these cases often come with stricter terms, including higher interest rates and larger down payments. Additionally, a higher credit score can provide borrowers with greater flexibility and access to a broader range of loan products. Therefore, maintaining a good credit history is beneficial for investors seeking DSCR loans, as it can significantly impact both the approval process and the overall cost of borrowing.
5. Property Types and Use
DSCR loans are provided for the following investment property types: single-family homes, multifamily properties, properties with more than 4 units, commercial office spaces, hotels and more. Both residential and commercial properties can qualify for DSCR loans, provided the property is being used as an investment property to generate income.
6. Loan Types
There are both adjustable-rate and fixed-rate DSCR loans available, to suit different borrower needs. It is most common for the loan terms to be 30 years, but some lender even offer the option of a 40 year stabilized loan, depending on the lender. There are also interest-only options being offered by certain lenders.
7. Number of Properties Owned
Most home loans will have a limit to the number of properties that can be bought with the loan, however DSCR loans do not limit borrowers to a specific number of homes. This is due to the fact that these loans are not based on personal finance, but rather on the investment property itself. So, those who are using DSCR loans can purchase as many investment properties as they want to.
8. Prepayment Penalties
Borrowers need to be aware of the prepayment penalties that could be associated with paying off a DSCR loan before the loan term is up. DSCR loans are not subject to any consumer protection regulations, so lenders will typically charge penalties to those who would like to settle their DSCR loan early.
9. DSCR Loan Limits
DSCR loan limits refer to the maximum loan amounts that borrowers can qualify for under Debt Service Coverage Ratio (DSCR) loan programs. While many lenders cap DSCR loans at around $3,000,000, some may offer funding up to $5 million, depending on the property’s income-generating potential and the borrower’s financial profile. The exact limit often hinges on factors such as the property’s net operating income (NOI), the required DSCR ratio of the lender, DSCR interest rates, and loan terms.
DSCR Loan Down Payment Requirements
20 – 25% (Depending On The Lender)
The down payment requirement for a DSCR loan generally hinges on the loan-to-value (LTV) ratio offered by the lender. In most cases, investors can expect to provide a down payment ranging from 20% to 25% of the property’s purchase price. For example, if the lender allows an 80% LTV ratio, a 20% down payment will likely be required. Some lenders may offer slightly more flexible terms depending on the borrower’s credit profile, experience, and the property’s income potential, but this range is typical across the industry.
For real estate investors, it’s important to factor this upfront cost into their investment planning. Unlike traditional loans, DSCR lenders place greater emphasis on the property’s ability to generate income than on personal income or employment history, but they still expect borrowers to have meaningful equity in the deal. Being prepared to meet the down payment requirement not only strengthens the loan application but also shows financial commitment, which can improve the chances of approval and potentially unlock better loan terms.
How To Get A DSCR Loan
Step 1: Find a lender
When you’re looking for a lender who provides DSCR loans, you can take a look online or ask real estate professionals or experts to point you in the right direction. Once you’ve found a lender, take a look at the requirements. You will often need to gather specific information about the property.
Step 2: Initial information
The first phase of the loan application will begin with the lender gathering information to determine the level of risk that the loan would come with. In this step, your DSCR will be needed, and the details of the loan will be outlined, such as terms, loan amount, fees and more.
Step 3: Gather documents
The next step is to submit all the relevant paperwork to the lender. These documents will be related to your business and the property itself, with a large focus on cash flow, however documentation around your personal finances won’t be required. DSCR loans are based on the property’s ability to generate a cash flow that will cover the debt, so an investor’s personal finances aren’t a big part of the requirements.
Step 4: Paperwork submission and loan closing
This is the last step of the process where you’ll submit all the relevant documentation and then loan closing takes place. Once you are approved for a DSCR loan, the lender will send you the loan terms, monthly repayments, interest rate and closing costs. These loans typically close quicker than others, based on the fact that there is little to no personal financial information required.
Once you have accepted the terms of the loan, the lender will send you a pre-qualification letter. The next step is to get a property appraisal done, which will be submitted, and the loan underwriting can begin. After this the final documents are signed and the loan is closed.
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Data driven hard money lending. Get your loan in under 10 minutes
Frequently Asked Questions
1. What Is Debt Service Coverage Ratio?
The idea is to generate enough rental income to be able to make the loan repayments every month, cover all the other operating expenses of the property, and still have money left over. A DSCR of 1 means that 100% of the property’s income will be used to cover debt. So, cash flow is one of the most important metrics in this scenario.
2. What Is A Good DSCR Ratio?
Lenders often look for a DSCR of at least 1.25, but preferably 1.5 or more, as this decreases the amount of risk for both parties. This means that real estate investors will be able to cover the debt and have money left over to tide them over any months where the property may be vacant, or when there are unexpected expenses.
3. How Do You Qualify For A DSCR Loan?
4. What Is an Acceptable DSCR For Most Lenders?
5. Can LLCs or Business Entities Qualify For DSCR Loans?
Absolutely—LLCs and other business entities are commonly eligible for DSCR loans. In fact, many real estate investors prefer to purchase investment properties through an LLC to limit personal liability and separate business activities from their individual financial profile. Using an LLC can provide an added layer of legal protection by shielding personal assets from potential claims related to the property.
When a DSCR loan is issued in the name of an LLC, the responsibility for repayment lies with the business entity rather than the individual. This structure can help keep the loan from impacting the borrower’s personal credit, provided the LLC is properly established and maintained. Additionally, borrowing through an LLC may offer tax benefits and simplify accounting for multiple investment properties, making it a strategic choice for serious investors.
6. How Do DSCR Loans Compare To Hard Money Loans?
DSCR loans and hard money loans both serve real estate investors, but they differ significantly in structure and benefits. Generally, DSCR loans offer:
- Lower down payment requirements
- Lower interest rates
- Reduced upfront points or fees
Where DSCR loans are designed for those who want longer-term financing and favorable loan terms, hard money loans are often short-term solutions with higher costs and faster approval times. Hard money loans typically rely on the property’s value, with minimal underwriting, making them easier to qualify for but more expensive in the long run.
In contrast, DSCR loans are usually underwritten based on the property’s cash flow potential and tend to provide greater flexibility for investors seeking to hold properties over several years. This makes DSCR loans a compelling choice for investors looking for affordable, long-term financing options rather than quick, high-interest capital.
Additional Resources
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