DSCR LOANS. Where to get approved?
Member since 2019 · 1 post · 3 votes
DSCR LOANS. Where to get approved?
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Mark MunsonBusiness Member
Lender · Orlando, FL · Member since 2022 · 440 posts · 300 votesHi @Nolan Dalton
As others have said, there are plenty of DSCR lenders out there. With a DSCR loan, you should expect up to 80% of the purchase price as the loan amount. As you talk to lenders, make sure you know the following:
1 Rate Lock Policy - If the DSCR lender doesn't rate lock for 45 days, then I'd go elsewhere. Some DSCR lenders will float the rate until the appraisal is back, leaving you open to having the rate changed during the floating period.
2. Ask about Origination Fees - A good, well-capitalized DSCR lender shouldn't be charging more than 2 points, assuming the loan amount isn't too low. If they are telling you 2.5+ in origination fees, you can probably find cheaper money elsewhere.
3. What is the DSCR Requirement - Look for a 1 to 1 ratio, anything higher like 1.2x might force you to put more money down.
If you need more feedback, happy to help. Best of luck!
37 Replies
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@Nolan Dalton
DSCR loans are great! I highly recommend them. They only ask you for your last two months bank statements and need at least a 720 credit score. That's it! No W2 or tax returns etc. But your interest rate is usually about 1% higher than conventional loans.
- Rochester, MN · Member since 2015 · 6 posts · 3 votes3y
Hello,
Sometimes I think some of the verbiage used by investors may be a bit different than what a banker hears or is used to, at least in my experience with banking and investors.
I work as a commercial loan underwriter for a major bank and I/we use DSCR in our underwriting all the time but we, at least in my commercial area, don't have a product called "DSCR Loan". It is just a way we may underwrite commercial requests, much like the OP's banker told them. And I'm projecting here, but it seems like the banker went through the list of named loans in their head like FHA, VA, jumbo, etc and wouldn't have "DSCR Loan" in a drop down list to select, as if you were asking for a FHA loan, so was stumbling a bit.
I'd maybe suggest asking more about how the loans are underwritten when speaking with a mortgage officer and if saying "DSCR Loan" doesn't seem to get you traction, maybe ask something like "well, I was hoping that my request could be looked at from a DSCR perspective as well as any other underwriting you do for the best chance at approval because of XYZ." That may trigger a better response and get them thinking more how to get it done instead of what to call it. The goal is to get the loan and agreeable terms, not have it called something special.
Something like that or even asking to speak with a business or commercial banker. They would have more experience with DSCR calculations and may pick up on what you're getting at more quickly compared to a loan officer who typically works with owner-occupier customers.
I have no experience underwriting consumer loans so I certainly could be wrong about who can or does what but my point is to not get hung up on needing something called a "DSCR Loan". This is just my interpretation when I listen to various podcasts and read forums. I also have eight rental properties so am also an investor and I think if I went up to our loan officer, who did our loans, and specifically asked for a DSCR loan he would just look at me funny.
- Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes3y
Quote from @Michael Whillock:
Quote from @Nicole Heasley Beitenman:
Quote from @Robin Simon:
Quote from @Nicole Heasley Beitenman:
Quote from @Eliott Elias:
Traditional banks will not offer this, private investors do. Get with a mortgage broker or @Robin Simon
Mortgage banks will as well. We offer them. The biggest issue I run into is that the minimum loan amount is too high for most markets in our state.
what are the typically minimums you see? We are $75k across the board in every state
I see $100-150k everywhere.
Just jumping into this thread rather than start a new one and my questions are related to this one.
Is the minimum loan amount shifting? I have been working with a MLO - delayed financing loan. We started the process with her lenders saying that we could do anywhere from 65% LTV to 75% LTV pretty comfortably with a minimum loan amount of 75K.
After starting the loan process, I learned that the lenders this MLO was working with were only offering 100K minimum. This won't work for the property because of the lower purchase price.Are there still plenty of lenders willing to work with a minimum loan amount of 75K with a 65% to 70% LTV?
There are. I've been on a huge hunt for lenders offering $75k and below for my own investment purposes. They're all private/HM lenders, but they do exist.
- Lender · Boca Raton, FL · Member since 2020 · 9 posts · 3 votes3y
Quote from @Nolan Dalton:
I want to get approved for a DSCR loan. I have walked through a few properties that I know would cash flow. Where can I find a lender? I talked with a manager at my local KeyBank and she told me "There is no such thing as a DSCR loan. That acronym is used as a ratio to determine if a loan would cash flow to qualify."
This would be my 4th property. I am 26 years old and I work in the trades. I am open to all options of lending.
Determining whether a property investment qualifies for a DSCR (debt service coverage ratio) loan can be a complex process, but by following a few key steps, it can be made much simpler.
- Understand the DSCR requirement: In order to qualify for a DSCR loan, the property must have a DSCR of at least 1.25. This means that the property's annual net operating income (NOI) must be at least 1.25 times greater than its annual debt service.
- Calculate the property's NOI: To calculate the property's NOI, subtract all operating expenses (such as property taxes, insurance, and maintenance) from the property's gross income. This will give you the property's annual net operating income.
- Calculate the property's annual debt service: To calculate the property's annual debt service, add up all of the mortgage payments, interest, and other debt payments that the property is responsible for paying each year.
- Compare the NOI to the debt service: To determine if the property qualifies for a DSCR loan, divide the property's NOI by its debt service. If the result is greater than or equal to 1.25, the property qualifies for the loan.
- Check the property's creditworthiness: Lenders will also review the creditworthiness of the borrower. They will look at the credit history, income, and other financial information to determine if the borrower is able to repay the loan.
By following these steps, you can determine whether a property investment qualifies for a DSCR loan. It is important to keep in mind that DSCR is just one factor that lenders consider when evaluating a loan application, and other factors such as property condition, location, and market conditions also play a role.
It is also a good idea to consult with a financial advisor or loan officer to get a better understanding of the loan requirements and to get an idea of how your investment property will be evaluated by lenders.
Feel free to reach out if you need more feedback, happy to help. Best of luck!
- Understand the DSCR requirement: In order to qualify for a DSCR loan, the property must have a DSCR of at least 1.25. This means that the property's annual net operating income (NOI) must be at least 1.25 times greater than its annual debt service.
- 3yKristen L GarnerBusiness MemberLender · Phoenix, AZ · Member since 2021 · 451 posts · 287 votes
DSCR loans certainly DO exist and they are a great tool for investors.
- Member since 2023 · 57 posts · 27 votes3y
Hey Nolan, I echo the sentiment of many of the posters here - banks will straight up lie to you sometimes regarding what options are available (especially if that particular bank doesn't offer it)
- Lender · NJ · Member since 2022 · 129 posts · 18 votes3y
Hi there, your banker is wrong! There is a such thing as a DSCR loan. Qualified on property income, not yours.
- 2yStacy RaskinBusiness MemberLender · Member since 2022 · 1k+ posts · 505 votes
Some DSCR lenders will go down to a $75K value and a $50K loan amount. It's the same work to do a $55K loan as a $500K loan so the fees will be higher due to the loan amount but will still be much lower than what a lender or broker gets paid on a higher loan amount.
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 < 1
Principal + Interest = $1,700
Taxes = $350, Insurance = $100, Association Dues = $50
Total PITIA = $2200
Rent = $2000
DSCR = Rent/PITIA = 2000/2200 = 0.91
Since the DSCR is 0.91, we know the expenses are greater than the income of the property.
DSCR >1
Principal + Interest = $1,500
Taxes = $250, Insurance = $100, Association Dues = $25
Total PITIA = $1875 Rent = $2300
DSCR = Rent/PITIA = 2300/1875 = 1.23If 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.
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