Pros of DSCR Loans

1. 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.
2. 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.
3. 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.
4. Fast Closing: These loans can close in as little as 20-25 days, compared to several months for traditional commercial loans.
5. Certainty of Closing: If the property meets DSCR guidelines, loan approval is almost certain, offering a more predictable closing process.
6. 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

1. 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.
2. Higher Minimum Credit Scores: DSCR loans often require higher credit scores (typically 660+).
3. Higher Interest Rates: DSCR loans usually have a 0.5%-1.5% higher interest rate than consumer bank loans.
4. Prepayment Penalties: Many DSCR loans include prepayment penalties, which are less common in retail loans.
5. 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.

Where Do DSCR Loans Work Best?

DSCR loans can be a great option for real estate investors across the country, but they work best in markets where rental income is strong relative to property prices and in regions with low HOA, Insurance Costs, and Property Taxes.

For markets where it is difficult to find find cash flowing real estate investments, short term rentals can be a great option to increase monthly cashflow and qualify properties for DSCR Loans.

Some of the best states for DSCR loans include:

• Florida – Popular for short-term rentals, Florida offers strong cash flow opportunities in cities like Miami, Orlando, and Tampa. Because of the high demand for vacation rentals in these prime markets, many small and mid sized family homes perform very well on Airbnb. This said, property taxes, insurance, and high HOA fees can often break the economics of DSCR Loans in Florida. Strong investment analysis is required by Florida investors.
• Texas – With no state income tax and consistently performing real estate markets in cities like Austin, Houston, and Dallas, Texas is an investor-friendly state. We’ve also seen oil-towns like Houston-Nederland and San Antonio perform very well with short an long term rentals (Texas DSCR Loans).
• Georgia – Atlanta and other key markets in Georgia like Augusta and Columbus provide affordable entry points for rental properties with high rental demand demonstrated by short time-to-lease across the State. DSCR Loans in Georgia are excellent option for local real estate investors.
• New York – While markets in New York City can struggle to cash flow with DSCR Loans at high Leverage, investors who can afford higher down payments can be very successful. New York City has relatively low property taxes as a proportion of purchase prices compared to other major US real estate markets. Furthermore, rental properties are almost always in high demand and vacancy rates in residential housing is low. DSCR loans in New York are a great option for liquid real estate investors.
• Maryland – With strong rental demand in Baltimore and surrounding areas and highly desirable short term rental markets in regions surrounding Washington, DC (like Bethesda), Maryland DSCR Loans are a great option for savvy investors.
• Indiana – Cities like Indianapolis offer low property prices and excellent rent-to-value ratios, making DSCR loans a great fit. DSCR Loans in Indiana are very popular for long-term rentals on 2-4 unit rental properties in the Indianapolis metroplex and surrounding areas.
• Massachusetts – Massachusetts is often an overlooked rental property investment market. With Boston pricing out most long term rental investors, there are many smaller cities with a population of 50,000 to 100,000 that perform very well with Massachusetts DSCR Loans.

How To Get a DSCR Loan?

If you’re a real estate investor looking to build your rental property portfolio, DSCR loans are a powerful tool. 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.