A Complete Guide On DSCR Real Estate Investor Loans

A Complete Guide On DSCR Real Estate Investor Loans

A major issue that real estate investors eventually face is being unable to qualify for conventional mortgages due to debt-to-income ratios, employment history, or reaching the limit of the number of conventional loans. This hinders an investor’s ability to scale and grow their real estate portfolio. 

Thankfully, there is a loan product designed for real estate investors called the Debt Service Coverage Ratio (DSCR) loan.

What is a DSCR loan?

A Debt Service Coverage Ratio (DSCR) loan is a type of investment property loan that primarily focuses on the property’s ability to generate sufficient income to meet its debt obligation to determine loan eligibility. 

Rather than using the borrower’s personal income, credit history, or debt-to-income ratio to qualify borrowers, lenders primarily qualify the property rather than the borrower. 

DSCR loans can be used for various property types such as single family, multifamily, mixed-use, commercial, and more. Each lender has their own unique criteria of what properties they will lend to.

Qualifying For A DSCR Loan

To qualify for a DSCR loan, borrowers need to have a property that generates sufficient income to cover the mortgage payments. Lenders will use rent schedules and compare this against the debt obligation. 

DSCR is calculated by dividing the property’s net operating income by its annual debt service. Lenders typically require at least a DSCR of 1.0 to qualify a property, although every lender has their own requirements and guidelines. Lenders would also consider factors such as the investor’s plan to improve the property and their reserve amount. 

Borrowers must also have a good credit score (typically at least 620) and sufficient down payment to be eligible for a DSCR loan. 

Pros & Cons Of A DSCR Loan

The DSCR loan offers many benefits for investors who are growing their portfolio. With easier qualifications required from the investors themselves, DSCR loans allow investors to acquire more properties without being limited by conventional guidelines from Fannie Mae or Freddie Mac. 

However, these loans are “riskier” to a lender, therefore, cost a bit more than a conventional loan.

Another major benefit with DSCR loans is that it also provides asset protection since these loans can close under an LLC. While many investors of conventional loans claim transferring title to their LLC works, there are no guarantees as the mortgage is still under their personal name, therefore tying the property to their name. Legal professionals would recommend having properties under an LLC from the start to avoid this loophole. 

Pros of DSCR loans:

  • Easier qualifications for self-employed and 1099 borrowers
  • DTI not applicable
  • Ability to close in an LLC (asset protection)
  • Employment history not required
  • Based off cash flow and not personal income or employment history
  • Flexibility in underwriting compared to conventional mortgages that MUST follow Fannie Mae and Freddie Mac guidelines
  • No limitations on the number of mortgages
  • 30-year fixed rate available

Because this loan is an investor-focused loan product, DSCR loans are riskier products for lenders. 

Cons of DSCR loans:

  • Higher interest rates and fees compared to conventional loans. Interest rates are slightly higher than an investment property conventional loan and lenders charge an origination fee (typically 1% of the loan amount). 
  • Some lenders require DSCR loans to close in an LLC as a business-purpose loan so investors will incur LLC formation costs (depends on each state and structure)
  • Prepayment penalty (usually for the first 3 years)
  • Down payments typically range from 20-25% and may require a higher down payment if the property has a lower DSCR in order to reach the minimum required DSCR

Final Words

The DSCR loan is an amazing loan product for investors looking to grow their portfolio without worrying about the restrictive guidelines of Fannie Mae and Freddie Mac. 

By focusing on the property’s cash flow rather than the borrower’s personal income, credit history, DTI ratio, and employment history, these loans provide easier access to financing for W-2 employees, self-employed borrowers, and 1099 contractors.
If you’re interested in financing an investment property with a DSCR loan, reach out to me at my email: millennialmoneyveteran@gmail.com

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