DSCR Loan Requirements

DSCR Loan

30- year fixed DSCR Loan for stabilized rental properties

Interest Rate

from 7.5

Origination fee

2-3%

Loan To Purchase Price

up to 80%

Loan To Value

up to 80%

Minimum DSCR

None

Term

30-yr fixed rate

Minimum Loan Amount

$100,000

Maximum Loan Amount

$2,000,000

Minimum FICO

680

Type of Property

Residential 1-4 units

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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 75-80%
2. Debt Service Coverage Ratio None
3. Maximum Loan Amount $1 Million - $5 Million
4. Credit Score 680 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)

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 1.2 to 1.5. Which means that the property’s income will cover the operating expenses and the loan repayments, with money to spare.

3. Maximum Loan Amount

DSCR loans will generally have a maximum amount of $1 million or $ 2 million, but some lenders may even provide funding up to $5 million. The maximum loan amount provided by the lender will hinge on the investment property’s debt service coverage ratio.

4. Credit Score

While a DSCR loan doesn’t revolve around the borrower’s personal finances, there is typically a minimum credit requirement that will need to be met. Most lenders providing DSCR loans will require a FICO score of 680 and above. Usually, the higher the LTV, the higher the credit score will need to be. For example, a lender that is providing an LTV of 80% may require a credit score of 700.

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. The loan terms can be anywhere from 30 years to 40 years, 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.

DSCR Loan Down Payment Requirements

20 – 25% (Depending On The Lender)

The down payment requirement on a DSCR loan typically depends on the LTV ratio that is being offered. For LTV ratios of 80%, for example, a down payment of 20% may be required. Usually, DSCR loans require a down payment of between 20% and 25% of the property’s purchase price. Real estate investors should prepare for this at the outset if they choose to apply for a DSCR loan.

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.

Frequently Asked Questions

The Debt Service Coverage Ratio is a number that indicates how much of the debt can be covered by the rental income that is generated from a property. In real estate this would be calculated by working out the net operating income (NOI) and dividing it by the annual repayments due on a loan.

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.  

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.

 

Real estate investors who are purchasing a rental property, either residential or commercial, to generate an income, can apply for a DSCR loan. They should have a FICO score of above 640 and generally have enough money to contribute a 20% down payment at least. A DSCR of 1.2 or higher will be essential to qualify for a DSCR loan. The property’s cash flow will need to cover the debt and then some. These loans suit investors who would like to keep their investment property and their personal finances separate.
Most lenders will accept a DSCR of 1.2 to 1.5. The higher, the better, as this poses less of a risk for lenders. Lenders are essentially wanting to see the debt can be serviced by the rental income being generated, and that there will be funds left over once the debt has been covered. These extra funds will be a cushion for real estate investors, in case they have a bad month, and this means that they will be less likely to default on the loan repayments. A positive cash flow is therefore key.

Additional Resources

DSCR Loan

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.

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