Best DSCR Lenders and Loan Requirements
Last Updated on February 24, 2023 by Eric Jeanette
Best DSCR Lenders
DSCR lenders offer mortgages to for the purposes of purchasing or refinancing an investment property based upon it’s potential cash flow. These unique lenders offer a wide variety of options and programs which makes shopping for a DSCR loan challenging.
What is DSCR?
The term DSCR stands for “Debt Service Coverage Ratio”. It is a ratio that is calculated based upon the relationship between the income generated by the property versus the total monthly debt service. The income needs to “cover” the debt service.
We will help you to calculate the debt service coverage ratio (DSCR) further down in the article.
DSCR Loan Requirements
The DSCR loan requirements are less restrictive than a traditional mortgage and you can qualify without having the personal income or job requirement of a conventional loan.
These are the basic DSCR loan requirements but to get approved, you will need for your lender to review the property that you plan to purchase.
Down Payment
The minimum down payment for a DSCR loan is going to be 20% for most DSCR lenders and loan scenarios. The down payment may be more if your credit scores are below 680.
If the DSCR ratio is less than the lender’s minimum requirement, they may ask you to put more money down on the purchase to make the DSCR calculation work.
Credit Score
Most DSCR lenders are looking for higher credit scores than what traditional lenders may require for the purchase of a primary residence. You may qualify for the loan with credit scores as low as 620. However, the higher the credit score, the lower your down payment will be. The interest rate is also going to be tied to your credit scores.
Debt Service Coverage Ratio
The optimal Debt Service Coverage Ratio that DSCR lenders look for is 1.2 which means the rent is 20% greater than the monthly debt service. When your DSCR calculation is 1.2 or greater, you will get the best possible terms from the lender.
There are lenders who allow for a DSCR of less than 1 which means you are cash flow negative each month. When this scenario occurs, your down payment and interest rate may be higher.
Prepayment Penalties
All DSCR loans that are designed for a long term property hold will have a prepayment penalty. The typical prepayment penalty offered by DSCR lenders is 3-5 years. The lower the prepayment penalty, the higher the rate.
Prepayment penalties can be bought down by raising the interest rate or paying a fee. If you absolutely must have no prepayment penalty, then what you may need is a short term bridge loan. The rate would be higher but you will not have a prepayment penalty.
The prepayment penalties are a declining penalty as time passes. For example, a 3 year prepayment penalty means if you prepay your mortgage in the 1st year, the penalty is 3% of the mortgage balance. In year 2, the prepayment penalty is 2%, and in year three it is 1%.
Investment Experience
Various DSCR lenders offer better terms to borrowers who have extensive real estate investment experience. You are less of a risk if the lender can see you are a successful investor. Sometimes, this experience could result in a lower down payment. This is especially true with fix and flip loans where the down payment could be reduced to 10% or even zero.
Investment experience can be a compensating factor when other aspects of your application are not optimal. Some examples would be lower credit scores or a lower DSCR.
Best DSCR Lenders
There are many DSCR lenders in the United States and most of them cannot be found by doing a simple search online. These lenders also have many program options, terms and rates.
Some DSCR lenders are licensed in certain states, may or may not lend on rural properties, and have specific requirements for retail or office spaces too. Others may have different credit score or DSCR requirements.
Although the list below references some popular DSCR lenders, we highly recommend that you allow us to pair you with the lender that makes the most sense for your scenario. Otherwise, you may need to have many conversations explaining what you are looking to do. To start that process, please complete this short form.
Click to complete the request form and speak with one of these lenders, or the dozens of other DSCR lenders in our network.
DSCR Loan Benefits
DSCR loans have many benefits that separate them from traditional or conventional loans. In general, qualifying for a mortgage to purchase an investment property may be challenging when you have a mortgage on your primary residence. It also becomes nearly impossible when you have many rental properties with quite a few mortgages.
These are just a few of the benefits that DSCR loans provide:
- No income verification
- No job requirement
- Down payment of only 20%
- Can purchase under an LLC
- No experience required
- Cash out refinances allowed
- Property can be vacant at the time of financing
- Multiple property types may be eligible
- You can finance many properties at the same time
- Loans available as interest only to keep payments low
These are just a few of the many benefits of using a DSCR loan to finance your investment property.
DSCR Property Types
You can finance various property types with a DSCR loan. Below, we will list these properties and also some scenarios where the program may apply.
- Single family residences
- 2-4 unit rental properties
- 5+ unit apartment buildings
- Mixed use properties
- Retail properties
- Office properties
- Short Term Rentals (AirBnB)
- Cash out refinances
- Refinancing after rehabilitating a property
How to Calculate DSCR
You can find various ways to calculate DSCR but most of the sources you can find do not truly show exactly how to do it.
The basic DSCR calculation is as follows:
What we want to explain is how to determine each of the inputs within the calculation:
Monthly Rental Income = How much rent is currently being collected on a monthly basis. If the property is not rented now, what is a legitimate estimate of what the monthly rental income will be. You will need to disclose whether you plan to rent the property on a long term lease, or short term because the rental estimate will be different.
Monthly Debt Service = The total monthly payment to include the following:
Monthly principal and interest
Monthly taxes
Monthly homeowner’s insurance
Monthly HOA (if applicable)
Any other monthly required fee
In this example where monthly rental income is $1200 an the monthly debt service is $1000, the DSCR would be 1.2.
What Others are Saying about DSCR Lenders
Eric Jeanette – “DSCR loans are a great way to finance multiple properties while building wealth.”
Gustan Cho – “DSCR lenders benefit investors by simplifying the mortgage application and approval process.”
Wikipedia – “In commercial real estate finance, DSCR is the primary measure to determine if a property will be able to sustain its debt based on cash flow.”
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