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DSCR Loans: Should You Use One To Invest In Real Estate?

DSCR Loans: Should You Use One To Invest In Real Estate?
Richard Advani

Richard Advani

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When it comes to financing, there are a variety of options available to real estate investors. One of these options is a DSCR loan, which is also known as a Debt Service Coverage Ratio Loan. Learn more about this lending option below.

What is a DSCR loan

DSCR loans or “Debt Service Coverage Ratio Loans” are loans based on a rental property’s ability to debt service or cover the expenses of the loan based on the rental income received. DSCR loans do not require income documentation as they are based on the income the property generates itself vs. on the income and debts of the applicant as required by conventional loans.

Who is the best candidate for a DSCR loan?

DSCR loans have been growing in popularity over the past several years as an attractive alternative for investors that may not qualify for a conventional full doc loan. The best candidates for a DSCR loan are as follows:

Investors with over 10 financed properties

With conventional loans investors are limited to a total of 10 financed properties including their primary home. DSCR loans have no limit on the number of financed properties an investor has and really provides the pathway for investors looking to expand their portfolio.

Full time real estate investors, self-employed, retired, or low-income investors

DSCR loans are great options for investors that may not meet the income requirements for conventional loans given that the qualifications for DSCR loans are based on the income the property generates.

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Self-Employed, retired and full time real estate investors generally have a hard time qualifying for a traditional loan given the strict debt to income ratio requirements associated with a traditional loan, plus the fact that self-employed clients and RE investors alike employ many tax protection strategies to reduce their overall income taxes. However, this makes it difficult to qualify for said traditional/conventional loans. DSCR loans allow these types of investors to easily qualify for rental purchases.

Investors that want an easy, hassle-free loan

Debt service coverage ratio loans do not require any income documentation. No tax returns, paystubs or W2’s means these loans can be closed with minimal effort and stress.

What are the qualification requirements for a Debt Service Coverage Ratio loan?

Although Debt Service Coverage Ratio (DSCR) loans have way fewer requirements than conventional loans there are still a few important things to note:

  • DSCR loans require credit scores of at least 680.
  • Generally, you are required to own a primary home – exceptions can be made for experienced investors.
  • DSCR loans require that all the down payment funds are seasoned and are coming from the loan applicant.
  • DSCR loans allow you to close title in your personal name, trust name or that of an LLC.
  • It is possible to proceed with a property that does not cover the total payment of the property or does not DSCR. However, there will be an increase in the rates/costs of the loan.

General loan features for DSCR loans:

  • Standard 30-year fixed rate fully amortized loan
  • Available 40-year fixed rate loan with 10-year interest-only option
  • Purchase, cash out or rate and term refinance loans available
  • Up to 80% LTV for purchases
  • Up to 75% LTV for cash-out refinances
  • Rates on average are about 1.25% higher than conventional loans
  • 2-3 points are standard
  • DSCR loans typically have prepayment penalties ranging from 3-4 years
  • Loan amounts can range from $75k – $1.5M
  • Properties can close in the name of an LLC
  • No limit on total number of financed properties

Summary

Although conventional loans remain the most cost-effective means to purchase investment real estate, more and more investors are starting to exceed the conventional 10 financed property rules and DSCR loans continue to fill a much-needed void in the market. This allows us as investors to still take advantage of one of the most attractive parts of investing in real estate – leverage.

Looking to learn more about non-conventional lending options? Need help finding investment property in the best markets around the country? We can help! Become a member of RealWealth today to view sample properties and to connect with experienced lenders, 1031 exchange intermediaries, CPAs and more. It’s 100% free to join and signing up takes less than 5 minutes.  

Richard Advani
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