DSCR Loan Pros and Cons
Pros of DSCR Loans
- No Personal Income Verification: DSCR loans are based on the rental property’s cash flow, not the borrower’s personal income, making them ideal for real estate investors without W-2 income.
- Non-Reporting To Credit Bureaus: Since DSCR loans are business purpose loans, personal guarantors’ credit utilization factor isn’t affected by securing a DSCR loan.
- Scalable Way Top Build Rental Portfolios: As long as you have cash flowing properties, there is no limit on the number of properties you can finance with a DSCR loan.
- Fast Closing: These loans can close in as little as 20-25 days, compared to several months for traditional commercial loans.
- Certainty of Closing: If the property meets DSCR guidelines, loan approval is almost certain, offering a more predictable closing process.
- Competitive with Hard Money Lenders: DSCR lenders are often more flexible, offering cash outs, rate buydowns, adjustable rates on DSCR loans that banks cannot.
Cons of DSCR Loans
- Higher Down Payment: For select income based loan programs banks will finance up to 90%+ of the purchase price on rental properties. DSCR loans are capped at 80% LTV.
- Higher Minimum Credit Scores: DSCR loans often require higher credit scores (typically 660+).
- Higher Interest Rates: DSCR loans usually have a 0.5%-1.5% higher interest rate than consumer bank loans.
- Prepayment Penalties: Many DSCR loans include prepayment penalties, which are less common in retail loans.
- Lower Consumer Protection: As business-purpose loans, DSCR loans are not bound by the same consumer protections of federally-backed loans. This means that lenders have access to a more expedited foreclosure process in the event of loan non-payment.
What is a DSCR Loan?
A DSCR loan, or Debt Service Coverage Ratio loan, is an asset based loan for real estate investors. Unlike traditional bank loans which rely on the borrower’s personal income, DSCR loans focus on the property’s income-generating ability. This means the loan approval hinges on whether the property’s net operating income (NOI) can cover the debt obligations. (Read more about DSCR Calculations with Ridge Street Capital’s BRRRR Calculator)
The DSCR is calculated by dividing the NOI by the annual debt service. Debt service is the sum of the monthly loan payments, taxes, insurance, and association fees on the property. Lenders typically look for a DSCR of 1.0 or higher. A ratio above of 1.0 indicates that the property generates enough income to cover its debt and operating expense, while a DSCR of 1.2 or higher means there’s a cash flow buffer, reducing the lender’s risk.
For single family homes, most lenders will provide financing on properties with a DSCR of 1.0. As the number of units increases (multifamily and commercial properties), the minimum DSCR requirement increases to 1.15-1.2 to account for vacancies and property management expenses.
How To Apply for a DSCR Loan?
If you’re a real estate investor looking to build your rental property portfolio, a DSCR loan is a powerful tool. They are particularly beneficial for those who have found lucrative deals and want to scale their rental property investment portfolio.
Applying for a DSCR Loan takes 2 mins with Ridge Street Capital. From first time investors to seasoned rental property portfolio owners, Ridge Street Capital makes it easy to secure a DSCR loan on your investment properties.
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Fix and Flip
Funding For Rehab + Purchase
$50,000 up to $3,000,000
Interest Rate 10.5%-11.99%
Origination Fee From 1.5%
Up to 90% of Purchase and 100% of Rehab
Rental Property
30 Year DSCR loans
Ground Up Construction
Ground Up Construction loans in Florida and Texas
Up to $3,000,000
Interest Rate 11.50%-13.25%
Origination Fee From 1.5%
Up to 75% of Purchase and 100% of Construction