OfferMarket

DSCR Loan

Last updated: March 16, 2024

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DSCR Loan Example

DSCR Loan Interest Rates

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How is DSCR loan interest rate determined?

  • DSCR loan interest rate = 5-year Treasury rate + spread
  • The 5-year Treasury rate is determined by forces in the Treasury market and is currently at 0.00%
  • The deal spread is controlled by your credit score and the LTV of the loan.

DSCR loan interest rate = 5-year Treasury rate + Spread

DSCR Loan Requirements

What are the requirements for a DSCR loan?

Borrower credit requirements

  • We ask for a minumum credit score of 660 from our potential borrowers because, while not perfect, credit score is a great indicator of borrowers ability to submit on time loan payments. Since a higher credit score demonstrates an ability to stay on top of payments, borrowers with a credit score above 720 get the lowest interest rates and access to higher LTVs.
  • All DSCR loan products are meant as business purpose loans and thus are provided to LLCs and not individuals. For purchases, we often guide our clients to complete the necessary paper work to create an LLC and purchase the property in the name of the LLC. For refinances, the title company will help transfer the ownership to an LLC that the borrower controls.
  • We do not require W-2 documents from our borrowers. Since the loan is based on the cash flow of the property, we do not need to see the personal income of the borrower.

Deal DSCR requirements

  • Our minumum DSCR requirement is 1.11. This means that the rental property must cashflow (earn rent) at 11% more than the combined principle and interest payment on the loan, taxes, insurance and HOA fees if any. DSCR is a profitability measure and thus higher DSCR deals earn better terms since they present a lower risk from perspective of the lender.
  • The deal must be a business purpose deal. This means that the rental property must not be owner occupied owner occupied nor occupied by any party related to the owner. The property must be rented out to a third party.
  • Is the property located in a rural area? We do no lend on rural properties. How to indentify if your property is rural?

Downpayment requirements

  • Our highest LTV reserved for the most qualified borrowers is 80% LTV, which means the lowest amount of downpayment is 20%. We often ask for 25%-30% downpayments from less experienced borrowers. While there are legends in the industry about no downpayment DSCR loans its seldom that these loans are offered on competitive terms.
  • The downpayment cash to close must not be sourced from a private money lender. If a client didn't have funds for a downpayment and instead had to borrow them and pay interest on the funds, they would be considered as overleveraged for the purposes of a DSCR loan.

DSCR Loan Example Deal

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How to get a DSCR loan?

Find a potential property

  • Identifying an area with robust local economy that can support rents is paramount to getting a correct property. Use your local knowledge of a region to narrow it down to a few select areas that you think have an edge on the rest of the region. The edge could be low price of housing compared to rents, stable employment opportunities or something else. If you decide to look for a property in a different state or region, make sure to become an expert on that area (a personal visit is often more informative than anything you can learn online)
  • Understand the local inventory. It might take you a year or more (to see peak and through seasons) to become comfortable with quality of local listings. Subscribe to alerts on as many real estate websites as you can, to get your eyes on as many listings as possible. Here is a list of some of the sites where you can do that to get you started:
  • After learning the inventory that comes along and understanding the local market, you will start to see deals that seem too good to be true. These are the deals that you should focus on. Deals that are priced below market, have a high DSCR and are in a good location are the ones that you should focus on.

Get supporting numbers

  • Understand trends in local rents. What drives local economies to be able to support local rents? Is there a preference for certain type of housing in this area specifically that is expressed through rent demand imbalance in the listings you see? Leverage some of these online resources to get started:
    • Use Neighborhoodscout to get a sense for average rents, types of homes and other data.
    • Use for rent finding sites like Zillow to see what current for rent inventory is available on the market and how your potential property would compare.
    • An often overlooked resource which is great to get a sense of a local rent market is Craigslist Homes
  • Now you must estimate, to the best of your abilities, all the expenses that will be taken out of the rent that you will be collecting on your property.
    • Use OfferMarket Insurance to get a quote for your potential property so you have a hard number for how much it will cost
    • Rent listings on sites like Zillow will often list expenses that a new owner might face, so look through the listing with great detail to gather that information
  • Finally, gather information about taxes for your potential investment property. Most local governments have online resources to check taxes. Use an online search engine and look up "property taxes in [your city]" to get started. Sometimes even using property's address with "... property taxes" might results in exact site for the local government property tax department.

Plug in the numbers

  • Now that you have gathered all the relevant numbers its time to plug them into the DSCR loan calculator to get a sense if the deal is a 'home run'. To have a complete picture, lets look at an example DSCR loan calculation. Our example deal information is as follows:
  • Now that you have plugged in number into the calculator and saw that the deal has a positive cash flow (~
    $367
    ) and the cash to close figure (~
    $32,032
    ) is within your budget you will have confidence that you can proceed with getting a DSCR loan. Make sure to apply for a DSCR loan before you put in an offer, so you have a lender lined up as well as a pre-approval letter. You can get a pre-approval from OfferMarket, once you complete an instant quote
  • Finally, make sure that your cash flowing property has enough margin in its cash flow to allow you to build up reserves for unforseen repairs. A portion of every rent payment should be saved and accumulated in a reserve fund that is invested in liquid securities with low risk so you have a rainy day fund specifically for this property's repairs. Same wisdom applies to cash to close number. Make sure you have enough funds left over after you pay that number for the property in case you discover necessary repairs. Our clients often find hidden damage in the properties so having extra reserves is alwasy a wise idea.

DSCR Loan Calculation

How do I find out DSCR and cash to close for my DSCR loan?

  • Use the calculator below to find out exact DSCR and cash to close for your DSCR loan
  • Estimate numbers you don't know to get an approximate ballpark information
  • The calculation will show you cash flow of your deal and cash to close

DSCR Loan Questions

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