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If you’re a real estate investor looking for an alternative way to finance investment properties, a DSCR loan is a great option to consider. DSCR loans have recently risen in popularity and are quickly becoming a preferred funding method for real estate investors.

Summary

  • A DSCR loan is an alternative investment loan to help fund investment properties
  • Instead of using personal income to qualify, a DSCR loan uses rental income from the investment property to qualify for a loan
  • A DSCR ratio of 1.0 indicates that the investment property generates enough cash flow to cover the monthly debt obligation and nothing more.

What is a DSCR Loan?

A DSCR (debt service coverage ratio) loan is a type of non-QM loan that can help investors qualify for a loan without using their income. Instead of using personal income, a DSCR uses the rental income generated from an investment property to qualify for the loan. This is a great option for investors to consider who may not be able to qualify for a traditional investment loan. 

Instead of getting a hard money loan which can be much more expensive for investors, a DSCR is a much more cost-effective way to finance an investment property.

Debt Service Coverage Ratio

The debt service coverage ratio is meant to show a property’s ability to meet its monthly debt obligations. Instead of using a borrower’s income to qualify, a DSCR loan will use the past 12 months of rent rolls from the investment property.

DSCR Formula and Calculation

The debt service coverage ratio is a ratio of a property’s annual net operating income divided by its annual mortgage debt. Lenders use this ratio to measure the net operating income available to service the underlying mortgage.

DSCR = NOI/ Debt Obligation 

Where:


  • DSCR is the debt service coverage ratio
  • NOI is the monthly net operating income from the property
  • Debt obligation is the monthly mortgage payment amount

For example, let’s assume a property generates $100,000 per year in net operating income and has a yearly debt obligation of $37,000. In this case, the DSCR would be 2.70.

DSCR Loan Calculator 

DSCR Loan Calculator

What is a Good DSCR Ratio?

Below is our DSCR scale that can give you a good idea of what is considered a good DSCR ratio.

DSCR Ratio Scale

A DSCR ratio of 1.0 indicates that the investment property generates enough cash flow to cover the monthly debt obligation and nothing more. Any ratio below 1.0 indicates that the cash flow from the property is not able to meet the monthly debt obligation. 

Recommended Reading: Home Equity Conversion Mortgage (HECM): Details, Features, and Requirements

Different lenders have different DSCR minimum requirements. Most lenders will require a minimum of 1.25 DSCR to qualify for a loan. However, some lenders like GriffinFunding.com can go as low as a .75 DSCR. As you can see, the higher the ratio the better. 

Standard Eligibility Requirements for DSCR Loans

DSCR loan requirements will vary by each lender, but most tend to have the following qualification requirements below:

  • Minimum DSCR ratio of .75 (will depend on the lender)
  • 20-25% down payment
  • Investment properties must be owned by an LLC
  • Max LTV ratio of 80%
  • A minimum credit score of 640 (but may vary by lender)
  • 6 months of reserves ( depends on the lender)

The requirements offer investors a great opportunity to get an investment loan without using their income. It’s also worth noting that the minimum DSCR ratio will vary by lender and so will the minimum credit score.

DSCR Loan Pros and Cons

Pros of DSCR Loans for Real Estate Investors

  • Allows investors an alternative way to fund investment properties
  • Investors can use the income generated from an investment property instead of their own income to qualify
  • Gives investors the ability to quickly scale their real estate portfolios 
  • Increasing your NOI can allow you to get additional funding for future investments

Cons of DSCR Loans for Real Estate Investors

  • Higher down payment requirements
  • DSCR loans tend to have higher interest rates than standard rental loans
  • 6 months reserve requirements to service the loan

List of DSCR Lenders

Below is a list of some of the top DSCR lenders.


Angel Oak Home Loans
855 – 907 -3965
https://angeloakhomeloans.com/

Park Place Finance
866-409-3307
https://parkplacefinance.com/

Mbanc
844-918-1886
https://www.mbanc.com/

Griffin Funding
855-394-8288
https://griffinfunding.com/

JmacLending
949- 390-2688
https://www.jmaclending.com/dscr

Conclusion

As you can see, a DSCR loan can be a great way to fund your investment properties. They feature flexible terms and allow you to build your real estate portfolio even if you don’t have the income to qualify. Before you decide to get a DSCR loan it’s important to carefully access the property you plan to purchase and see if it makes sense for you.

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