Thoughts on DSCR Loans for Investment Properties?

Question

As a hard money broker, I’ve been seeing more investors use DSCR loans for rental properties and other investment projects. I’m curious to hear from others in the community—how are you finding DSCR loans as an option? What types of deals have you used them for, and how has the process been for you in terms of qualification and rates?

Looking to learn more about real-world experiences with DSCR loans from both investors and brokers alike. Any insights would be appreciated!

Stacy Raskin · Answer

DSCR loans are a good option to purchase rent ready or already rented investment properties. They can also be a good exit strategy for an investor who used a hard money loan and would like to refinance to pull cash out for their next investment property deal. There are lenders who can do a cash out refinance for the new appraised value after three months so it can be a good choice for an investor who's doing a BRRRR.

These loans can work for investment properties that are long term rentals, short term rentals, non warrantable condos and condotels. Generally 1-4 units have better terms compared to 5-8 unit programs.

There are DSCR programs that go down to a 620 mortgage FICO score-higher credit scores will have better rates. There are DSCR programs that are 20% down for 1-4 units with a 680 and above credit score depending on state. There are cash out options up to 75% LTV. I've seen 80% LTV on a cash out but the rate will generally be 1% higher compared to a 75% LTV and the 80% LTV would need a 1.25 DSCR ratio.

There are different lending options depending on the state and the lender. Mortgage brokers can be helpful as they work with investment property lenders that have better rates and terms that don't advertise directly to the public.

More on DSCR loans: DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth. Here's a bit more in detail about how rates are calculated for DSCR loans:1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs. I've included an example below to help illustrate this.So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.See example below:DSCR < 1Principal + Interest = $1,700Taxes = $350, Insurance = $100, Association Dues = $50Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91Since the DSCR is 0.91, we know the expenses are greater than the income of the property.DSCR >1Principal + Interest = $1,500Taxes = $250, Insurance = $100, Association Dues = $25Total PITIA = $1875 Rent = $2300DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further.

Nick Belsky · Answer

@Allison Somera

DSCR loans are built for investors with investment properties in mind.  Conventional lending is anything but built for investors.  Personally, I can see no valid reason to ever use conventional financing for an investment property.  The largest argument against DSCR is the rates are higher than conventional.  From time to time, the DSCR rates do get lower than conventional.  But, if 0.25-0.50% more in rate for a DSCR loan is "breaking" your deal, then you are already losing as it is.

My two cents.

Cheers!

Roger Mace · Answer

DSCR (Debt Service Coverage Ratio) loans are often used in real estate financing, particularly for investment properties. The DSCR is a financial metric that measures a property's ability to generate enough income to cover its debt obligations. Here are some thoughts on DSCR loans:

1. **Income Focused**: DSCR loans prioritize the income generated by a property rather than the borrower's personal income. This can be advantageous for real estate investors who may have significant cash flow from their properties.

2. **Risk Assessment**: Lenders use the DSCR to assess risk. A higher ratio (typically above 1.0) indicates that the property generates sufficient income to cover the debt, making it a lower-risk investment for lenders.

3. **Flexible Financing**: DSCR loans can offer more flexibility in terms of qualification, especially for those who may not have a traditional income stream. This is appealing for investors looking to expand their portfolios.

4. **Interest Rates**: Depending on the property's risk profile and market conditions, DSCR loans may come with competitive interest rates. However, properties with lower DSCRs might face higher rates due to increased risk.

5. **Market Dependency**: The effectiveness of DSCR loans can be influenced by market conditions and property management. A downturn in the market can impact rental income, potentially lowering the DSCR.

6. **Long-Term Strategy**: These loans are often seen as a long-term financing solution, allowing investors to hold properties and build equity over time.

In summary, DSCR loans can be a powerful tool for real estate investors, but they require careful consideration of the property's income potential and market conditions.

Patrick Roberts · Answer

DSCR loans are great options when the borrower has good credit and the deal is really solid. As someone else mentioned, what I've seen a lot of in the past six months is deals that don't have the rental income to service the debt and borrowers with marginal credit. There are DSCR products for those scenarios, but they generally price worse than regular DSCRs. Conventional is still the gold standard, but DSCRs are a close second for good deals.

Tanner Lewis · Answer

DSCR works pretty cohesively with hard money, especially when you use the BRRRR method since it allows you to increase leverage on the back end refi.

It's also worked pretty well if doing STR since you can just qualify with AirDNA projected income, even if you have no STR experience.

Dave Webb · Answer

Currently, less properties are qualifying (or lower LTV being offered) due to the rental income not covering the mortgage loan plus expenses.

Jeff Chisum · Answer

I have done a couple of podcast episodes on DSCR loans.  When the make sense and what to look for in an originator and what to be aware of.

Matthew Crivelli · Answer

DSCR loans are a great option for investors looking to refi out of hard money or purchase stabilized rentals. Right now, DSCR loans are very competitive with what the banks are offering without all the paperwork that comes with conventional financing.