Debt Service Coverage Loans

[Chris Baek]

Hi, 

Does anyone have experience with this type of loan? And if so, how do you determine if you will be approved for a DSC loan? Thanks, Chris

[Nate Herndon]

Hi Chris, DSCR loans are very common in the investing world. Qualifications typically center around whether the monthly rental income can at least break even (1.00 DSCR) with the monthly PITI.

We would simply need to know the following information to determine eligibility, interest rate, and loan terms for DSCR financing:

o Purchase or Refinance
o Property Address
o Monthly Rental income
o Annual Taxes
o Annual Insurance
o Estimated Credit Score

The documentation is relatively light as well, compared to a conventional loan underwritten to your personal income/taxes/debts.

▪ Entity documents
▪ 2 months of bank statements
▪ Photo ID
▪ Lease agreement (refinance)
▪ Sales contract (purchase)

[Chris Baek]

Thank you!

[Erik Estrada]

Quote from @Chris Baek:

Hi, 

Does anyone have experience with this type of loan? And if so, how do you determine if you will be approved for a DSC loan? Thanks, Chris

 Hey Chris, 

I would start first by working with a broker that is well-versed in this space. Many DSCR lenders have different guidelines as it's a grey area type of loan.

But Generally, most lenders will want to see that the lease or market rent can support the mortgage payment, the borrower does not intent to live in the property, the borrower has 20% down + closing costs, 6 months reserves, and credit is above 620. 

[Nate Herndon]

Quote from @Chris Baek:

Thank you!

You are very welcome! The Chicago-area 1-4 units that I have worked on recently for clients have done very well on their appraised values.

[Mike Grudzien]

Quote from @Nate Herndon:

Hi Chris, DSCR loans are very common in the investing world. Qualifications typically center around whether the monthly rental income can at least break even (1.00 DSCR) with the monthly PITI.

We would simply need to know the following information to determine eligibility, interest rate, and loan terms for DSCR financing:

o Purchase or Refinance
o Property Address
o Monthly Rental income
o Annual Taxes
o Annual Insurance
o Estimated Credit Score

The documentation is relatively light as well, compared to a conventional loan underwritten to your personal income/taxes/debts.

▪ Entity documents
▪ 2 months of bank statements
▪ Photo ID
▪ Lease agreement (refinance)
▪ Sales contract (purchase)

 Nate,
Had to stop and give you KUDOs! You produced one of the better explanations of DSCR I've seen here.

Mike

[Robin Simon]

Quote from @Chris Baek:

Hi, 

Does anyone have experience with this type of loan? And if so, how do you determine if you will be approved for a DSC loan? Thanks, Chris

Hi Chris - I actually published a 10-part series here on BiggerPockets last year on everything you could want to know on DSCR Loans! - hope this helps!

DSCR Loans: What Are They And How To Get The Best Terms

https://www.biggerpockets.com/...

DSCR Loans: How To Use Pro Strategies To Save More And Make More

https://www.biggerpockets.com/...

Multifamily DSCR Loans: A New High-Impact Loan Option For Real Estate Investors?

https://www.biggerpockets.com/...

12 Frequently Asked Questions (And Answers) About DSCR Loans

https://www.biggerpockets.com/...

8 More Commonly Asked Questions and Answers to DSCR Loans

https://www.biggerpockets.com/blog/eight-questions-and-answe...

What Documents Do You Need for a DSCR Loan?

https://www.biggerpockets.com/blog/what-documents-do-you-nee...

BRRRR Loans: What Are the Options, and How Do DSCR Loans Stack Up?

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

Short-Term Rental Loans: What Are the Options and How Do DSCR Loans Stack Up?

https://www.biggerpockets.com/blog/short-term-rental-loans-a...

DSCR Loans: Terms to Know When Working With These Popular Rental Loan

https://www.biggerpockets.com/blog/dscr-loans-terms-to-know

What’s Next For DSCR Loans? Updates For 2024 and Beyond

https://www.biggerpockets.com/blog/what-is-coming-in-2024-fo...

[Brittany Minocchi]

Hey Chris - 

Nate gave a great explanation on what we as lenders look for with a DSCR loan. I would add that HOA is also factored in (if applicable) and the property needs to be rent-ready, not in need of rehab.

Some other things lenders may take into consideration: 

1. Do you currently own a primary home? 

2. Do you own any other investment properties? 

3. Are you looking to close in your name or an entity? 

4. What is the loan amount? 

5. What is the property type? 

6. Is the property a short term rental or long term rental? 

You'll fund that guidelines vary from lender to lender. Some will accept lower FICO scores than others, some require that you close in an entity, some won't allow first time homebuyers....just some things to keep in mind. 

Feel free to reach out if you have any questions, happy to connect! 

[Stacy Raskin]

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

The main factors for approval are credit score, down payment or equity and the rent ratio. These factors vary by lenders as different lenders have different underwriting criteria. 

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

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 = 1.23

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.

[Colin McMahon]

Hi Chris, 

DSCR loans are a great way to acquire investment properties. We do DSCR loans that can be under a 1.

This means the projected rental income is below the projected mortgage payment. If you have enough assets for a roughly 25% down payment plus closing costs the loan will get done. The DSCR ratio will impact what type of rate you get. There are a lot of different ways to calculate the rental income portion of the ratio, so it is best to send your lender the property address you are interested in so they can do some calculations for you.

I will send you a DM with more details if you are interested.