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Debt Service Coverage Ratio (DSCR)

If you’re interested in buying or refinancing an investment property but need flexibility to qualify for financing, consider a Debt Service Coverage Ratio (DSCR) loan.

DSCR loans provide financing based on a property’s cash flow. This makes financing more accessible than standard loans, which base financing on factors such as investor’s personal income and certain property requirements.

What is a DSCR Loan?

There are a handful of options to finance investment property. Loan types often differ based on their qualification requirements and the terms they offer. The best loan for you will depend on your individual needs. 

With a DSCR loan you can qualify for a mortgage based on the cash flow you will get from an investment property, such as a rental property. This means you can get financing based on the money you will make from the property, rather than your current personal income.

As a non-QM or (non-qualifying mortgage) a DSCR loan helps property investors get financing with non-traditional forms of income. It allows for more qualification flexibility because it doesn’t have to meet the documentation requirements that the Consumer Financial Protection Bureau sets for standard loans.

This makes investing in property more accessible as you can qualify without using your tax returns, employment verification, etc. It allows for a no-income loan with more flexible qualification requirements for new and experienced investors, while also providing competitive interest rates and terms.

How to Get a DSCR Loan

If you’d like to see whether you qualify for a DSCR loan, connect with us. To get you started, we’ve outlined the steps and qualifications needed to help you understand the process.

The Financing Process

By sharing basic information about your potential purchase or refinance, we’ll work with you to see if a DSCR loan meets your needs and whether your situation qualifies.

As we move through the process we’ll discuss the terms you qualify for and your financing options, as well as request the necessary documentation.

We’re with you through each step, leading to a simple and efficient closing so that you can move forward with your investment.

DSCR Loan Requirements to Meet

These are some of the common requirements often needed to qualify for a DSCR loan. If you have questions about these requirements, we’re here to help.

  • We’ll need to know what the expected leverage is for the property, whether the loan is for a purchase or refinance. In many cases, the Loan-to-Value ratio needs to be above 70-75%.
  • We’ll consider whether the property is vacant or leased. If leased, we’ll need to know how much and if it’s a short-term or long-term lease.
  • You’ll need to provide the annual property tax information for the investment property, as this will be considered when calculating your potential loan.
  • You’ll also need to provide annual insurance information for the property for the same purpose.

DSCR Loan FAQs

Financing property is an important step in reaching your investment goals. It’s normal to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.

How does a DSCR loan differ from standard investment property loans?

DSCR loans allow flexible financing options for more complex or unique investment scenarios. Often standard loans don’t allow financing for properties with more than four rental units, and they may have restrictions for unique property types. DSCR allows for more unique scenarios as financing is based on rental cash flow, rather than meeting standard requirements.

DSCR lenders also don’t need to limit the total number of rental properties you finance, unlike traditional lenders. DSCR loans can be given to an LLC, rather than an individual, which isn’t possible with standard mortgages.

Do I need good credit to qualify for a DSCR loan?

Although your personal income isn’t considered for financing, you will need to share your credit score to get approved for a DSCR loan.

The minimum requirements vary depending on the situation but a credit score of 640 or higher is often required. This is similar to the requirements needed to qualify for a standard investment property loan.

Why is it called a Debt Service Coverage Ratio loan?

The broad definition of “debt service” is the cash that is required to cover repaying interest and principal for a debt during a set period of time. Borrowers and lenders use the Debt Service Coverage Ratio to measure the ability to repay the annual debt service compared to the net operating income generated by the property.

It’s one measurement that helps determine what maximum loan amount you can get. It can help you and a lender understand whether a property generates enough income to cover the cost of a new loan.

How is the Debt Service Coverage Ratio calculated?

Calculating the Debt Service Coverage Ratio helps to estimate how much an investment property can rent for to help predict the property’s value.

To calculate it, you need to divide the net operating income of the property you want to finance by the total debt service. Net operating income is the revenue minus certain operating expenses. Debt servicing is the cash that is required to cover repaying interest and principal for a debt during a set period of time.

A larger DSCR means there is more income to service the debt, making it more likely you’ll qualify for the financing you want.

What costs are required to close a DSCR loan?

There are closing costs associated with processing any loan, and the costs of a DSCR loan are comparable to standard investment property mortgages. They include costs for the lender to service the loan, as well as an appraisal and other fees.

You’ll also likely need to make a down payment that will be paid at closing. This is typically 20-30% of the loan amount. In some cases gift funds are accepted up to a certain amount to help cover these costs.