This is everything you need to know about DSCR loans and how to get the maximum loan amount.
What is a DSCR loan?
DSCR loans use rental income to qualify real estate investors for long-term mortgages, without providing traditional income verification like tax returns or pay stubs. Compared to conventional loans offered by traditional banks, Debt Service Coverage Ratio loans, offer a simple route for investors to get financing for their rental properties without relying on personal income.
How do DSCR loans work?
In simple terms, DSCR loans assess the rental income of an investment property to determine the borrower’s ability to repay the mortgage without relying on personal savings. Unlike traditional mortgage loans, a DSCR loan lender will only consider rental income from the investment property during the underwriting process.
This is appealing for real estate investors who write everything off on their tax returns or own other real estate which affects their debt-to-income ratio (DTI). These “no-doc” loans focus on a borrower’s credit score and the property’s ability to generate a positive cash flow rather than relying on pay stubs, W-2s, or tax returns.
How is DSCR calculated?
DSCR is calculated by dividing the property’s net operating income (NOI) by the total debt service.
In simple terms, you divide the monthly mortgage payment by the subject property’s monthly expenses, which include principal and interest, property taxes, landlord insurance premiums, and any HOA fees.
DSCR Loan Example
The average home value in Colorado is $543,500. Since the average effective property tax rate is 0.48% for investment properties, we can expect property taxes to be around $2,608. Let’s assume a 7% interest rate and a 80% loan to value.
| Property Value | $543,500 |
| Loan to Value (LTV) | 80% |
| Down Payment | 20% |
| Interest Rate | 7% |
| Property’s Rental Income | $4,000 |
| Monthly Loan Payment | $2,892 |
| Annual Property Taxes | $2,608 |
| Annual Landlord Insurance | $1,000 |
| HOA Fees | $0 |
DSCR Formula:
Monthly Rental Income / (Loan Payments + Monthly Property Taxes + Monthly Landlord Insurance)
DSCR Calculation:
$4,000 / ($2892 + $217 + $83)
DSCR Ratio:
1.25
1.25
What DSCR ratio do lenders typically require?
Most DSCR loan lenders require a 1-1.2 DSCR ratio. Some DSCR lenders will go as low as 0.75x, but typically that’s just a marketing tactic to run your credit score and lock you in.
Use our DSCR loan calculator to see if you would qualify. Made exclusively for real estate investors.
Who qualifies for a DSCR loan?
Real estate investors can qualify for financing if they find that an investment property’s rental income exceeds its monthly debt obligations by at least 10-20%. Implying a 1.1x-1.2x DSCR ratio. Most lenders will also require a minimum credit score and minimum liquid cash reserves to get approved.
No previous experience is required to get approved, however it may help you slightly reduce your closing costs. Additionally, you’ll need an LLC or S Corporation to purchase or refinance a rental property.
What are current interest rates for DSCR loans?
The current interest rates for a DSCR loan start at 7%, but vary based on credit score, DSCR ratio and LTV leverage.
Every state and city has different regulation and risk profiles. For example, DSCR interest rates in Ohio and Pennsylvania are higher, because certain types of DSCR loans don’t have pre-payment penalties, therefore increasing the risk for lenders. Larger cities tend to be more competitive and generate higher monthly rental income, meaning a higher DSCR ratio and lower interest rates.
What are DSCR loan requirements?
Capital Ton requires a minimum DSCR ratio of 1.1x to qualify for a DSCR loan of up to 80% LTV.
| Minimum Credit Score | 680+ |
| Minimum Loan Amount | $100,000+ |
| Purchase/Refinance | Up to 80% LTV |
| Cash Out Refinance | Up to 75% LTV |
| Interest Rates | Starting at 7% |
| Minimum DSCR | 1.1 |
| Closing Time | 21-30 days |
What is the minimum documentation?
- Driver’s license or state ID
- Articles of organization
- LLC operating agreement
- EIN letter
- 2 months of bank statements
What types of properties qualify for DSCR loans?
Single Family Homes:
Detached residential non-owner occupied rental properties.
2-4 Unit Residential Properties:
Duplexes, triplexes, and fourplexes.
Townhomes:
Attached residential rental properties.
Condominiums:
Individual condo units larger than 600 sq ft.
What are alternatives to DSCR loans for investors?
Investors have various alternatives to DSCR loans.
Conventional Loans
Conventional loans for investment properties offer competitive rates but require full income verification with tax returns, pay stubs, W-2’s and 24 months of bank statements. Since these loans are for investment purposes, traditional banks tend to have stricter guidelines and will make sure you can afford multiple mortgage payments.
Hard Money Loans
Hard money loans typically come with 6 to 24 month terms. They offer up to 90% financing with flexible loan terms but often come with higher interest rates. These are great if you’re competing with cash buyers and want to close as fast as 3 days. Also, if the investment property needs renovations, you can get up to 100% rehab financing, then refinance with a long-term DSCR loan.
HELOC
A HELOC (home equity line of credit), is a great alternative to DSCR loans if you have equity in your primary residence. These are interest only loans, but like conventional loans they require 2 years of personal income verification.
Frequently Asked Questions
Do DSCR lenders require previous experience?
Every DSCR loan lender is different. Capital Ton does not require any previous experience to get approved.
Can first-time investors get a DSCR loan?
Yes, Capital Ton works with first-time real estate investors.
Do short-term rentals qualify for DSCR loans?
Yes, here are DSCR loans for short-term rental properties. These loan types will use projected cash flow from airbnb to calculate DSCR ratios.
DSCR loans for airbnb work great in Orlando, Miami, Nashville, Denver, Atlanta, Savannah, Breckenridge, Vail, Austin, Houston and other vacation rental destinations.
Do DSCR loans have prepayment penalties?
Most lenders offer 3, 5 and 7 year prepayment penalty options. Choosing a longer term prepayment penalty can help lower interest rates and improve DSCR ratio. Ohio and Pennsylvania have different regulations for pre-payment penalties.
How long do DSCR loans take to close?
Debt service coverage ratio loans take an average of 21-30 days to close.
Are there interest-only DSCR loans?
Yes, interest only payments are an excellent way to increase monthly cash flow, decrease monthly expenses and improve DSCR ratio.
Can these loans be used for owner-occupied properties?
No, DSCR loans cannot be used for owner-occupied real estate. Since these are business purpose loans for landlords, they are meant to be rented out to tenants.
What is the minimum credit score?
DSCR loans require a minimum credit score of 680 or higher. With a DSCR ratio of 1.5 or higher, investors can get approved with a 620 credit score.
What is the minimum loan amount?
The minimum loan amount is $100,000.
What is the maximum loan amount?
Purchase or Refinance:
Up to 80% LTV (Max $2 Million)
Cash Out Refinance:
Up to 75% LTV (Max $2 Million)
Portfolio DSCR Loan:
Up to 80% LTV (Max $50 Million)
What is the minimum down payment requirement?
The minimum down payment is 20%.
Is an appraisal required?
Yes, an appraisal is required to calculate current market rental rates, estimated monthly cash flow, and property value based on local comparables. These figures will be used to calculate a DSCR ratio and finalize your loan to value (LTV).
Which banks offer DSCR loans
Most traditional banks do not offer residential DSCR loans, however Bank of America offers DSCR loans for commercial properties.
Who offers DSCR loans?
Since traditional banks do not approve loans based on rental income, you have to find a reliable DSCR loan lender.
How to Apply for a DSCR Loan
Capital Ton specializes in DSCR loans for non-owner occupied investment properties in over 20+ states. We help real estate investors build portfolios by using monthly rental income to qualify for financing.
- See how much you qualify for
- No application fee
- Secure up to 80% financing
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