DSCR Loan
Last updated: March 18, 2023
There is a lot of inaccurate and misleading information online about DSCR loans. This article is continually updated in an effort to share clear, accurate, insightful and actionable information so you can grow your rental property portfolio cost effectively and avoid common mistakes.
What is a DSCR loan
A DSCR loan is a mortgage specifically for income producing rental properties. DSCR stands for debt service coverage ratio, a simple cash flow metric calculated by dividing the rental property's monthly income by the monthly mortgage payment. While the concept of DSCR has been around for many years in corporate finance, the novelty has been its application in the single family (1 to 4 unit) residential rental property asset class. In the aftermath of the 2008 global financial crisis, the DSCR loan market has quickly become a multi billion dollar asset class with growing interest and involvement from Wall Street. Given investor preference for DSCR loans instead of bank loans, we expect to see continued growth in demand, origination volume, and market share for this loan type.
DSCR Loan Meaning
DSCR stands for debt service coverage ratio. A DSCR loan is a loan that is provided to a borrower to finance a specific investment property based on the debt service coverage ratio of that property.
Business Purpose Loan
A DSCR loan is a business purpose loan. Business purpose loans are commercial loans used by borrowers who seek to generate income by buying and managing a rental property. DSCR loan documents include a business purpose and occupancy affidavit where you (borrower) certify that your will be operating the property for business purpose and that neither you nor your relatives will be occupying the property as a personal residence.
Given that DSCR loans are business purpose loans, not consumer loans, most states do not require private lenders that originate DSCR loans to have an NMLS license. For liability protection, most DSCR lenders require title to be held in a business entity such as an LLC or Corporation.
DSCR Loan Program
The term "DSCR loan program" refers to the specific guidelines and requirements of a specific lender. While each DSCR loan program may vary slightly in as far as guidelines, because DSCR loans are aggregated and securitized (packaged into mortgage-backed securities), there is a high degree of consistency across lenders and programs. When comparing DSCR loan programs, the most important distinction to be aware of is the specific asset class -- i.e. 1-4 unit, 5-8 unit. For this guide and our private lending platform, we focus on 1-4 unit residential.
Program Guidelines
| Asset Class | 1-4 Unit |
|---|---|
| Term | 30 Year |
| Rate Options | Fixed, Adjustable |
| Amortization Options | 20 Year, 23 Year, 25 Year, 30 Year |
| Rural | Not Allowed |
| Minimum Credit Score | 660 |
| Experience Required | No |
| Borrowing Entity | LLC, Corporation, Personal Name |
| Personal Guarantee | Yes |
| Portfolio Loan (2+ Properties) | Yes |
| Minimum As Is Value | $62,500 |
| Minimum Loan Amount | $50,000 |
DSCR Loan Requirements
DSCR loan requirements are subject to change based on market conditions. During periods of economic stability, DSCR program guidelines remain unchanged for prolonged periods of time. Guidelines can change frequently during periods of economic volatility including interest rate volatility, inflation fears, housing market price declines, recession fears, Fed policy uncertainty.
| OfferMarket | Most DSCR Lenders | Most DSCR Lenders |
|---|---|---|
| Minimum DSCR | 1.1 | 1.2 |
| Minimum Rental Property Experience | 0 | 1 |
| Hard Credit Pull | Yes, Tri Merge | Yes, Tri Merge |
| Minimum Credit Score | 660 | 680 |
| Minimum Loan Amount | $50,000 | $75,000 |
| Minimum As Is Value | $67,500 | $100,000 |
| Appraisal Report with Onsite Inspection | Yes | Yes |
| Appraisal Condition Rating | C1, C2, C3, C4 | C1, C2, C3, C4 |
| Rural Designation | Not Allowed | Not Allowed |
| Maximum LTV: Purchase | 80% | 80% |
| Maximum LTV: Cash out refi | 75% | 75% |
| Maximum LTV: Rate and term refi | 80% | 80% |
| Seasoning Requirement | None | 6 months |
| Escrowed Taxes and Insurance | Yes | Yes |
| Portfolio Loan (2+ Properties) | Yes | No |
| Landlord Insurance | Yes | Yes |
| Flood Insurance | Yes, if in FEMA flood zone | Yes, if in FEMA flood zone |
DSCR Loan Qualifications
DSCR loan qualifications are deal-specific and borrower-specific.
Deal-specific
🏠 property type, condition, value and location 💰 property cash flow (DSCR)
| OfferMarket | Most DSCR Lenders | |
|---|---|---|
| Property type | 1 - 4 unit, warrantable condo | 1 - 4 unit, warrantable condo |
| Appraisal Condition Rating | C1, C2, C3, C4 | C1, C2, C3, C4 |
| As Is Value | $62,500+ | $100,000+ |
| Loan amount | $50,000+ | $75,000+ |
| DSCR | 1.1+ | 1.2+ |
| Max LTV/LTC: Purchase | 80% | 80% |
| Max LTV: Cash Out Refi | 75% | 75% |
| Max LTV: Rate and Term Refi | 80% | 80% |
| Location | Non-rural, no boarded up neighborhoods | Non-rural, no boarded up neighborhoods |
Borrower-specific
💳 credit 🕵️ background 🏠 rental property investing experience
| OfferMarket | Most DSCR Lenders | |
|---|---|---|
| Credit Score | 660+ | 680+ |
| Background | Clean | Clean |
| Investing Experience | 0+ | 1+ |
DSCR Loan Pros and Cons
Pro: Limited documentation
Many people refer to DSCR loans as "no doc" loans but the truth is they are "low doc" loans. You do not need personal income verification or tax returns. That means you can get a DSCR loan without a W2 and without having your most recent taxes filed.
Pro: Fast processing
Because there is limited documentation, you can get a DSCR loan faster than a bank loan or a conventional loan. We have funded DSCR loans in as little as 14 days, and every DSCR loan time to close target is 25 days or less.
Con: Landlord insurance requirement
DSCR loan programs generally have strict landlord insurance requirements. Technically this is a good thing because it protects your investment, but it will be more expensive than personal lines homeowners insurance coverage. First time DSCR loan borrowers are often surprised by insurance requirements and frustrated by the increased annual premium and insurance review. A common mistake is using a personal lines insurance agent to shop for and bind coverage for your rental property. Personal lines insurance agents have limited experience with commercial policies and you can end up over-paying and wasting a lot of time. To streamline the insurance component of DSCR loans and save you money, we launched OfferMarket Insurance, our in-house insurance agency specialized in landlord insurance for DSCR loans.
| Landlord Insurance | Requirement |
|---|---|
| Property Insurance | Yes |
| General Liability Insurance | Yes |
| Business Interruption Insurance (Loss of Rent) | Yes |
| Mortgagee Clause | Yes |
| Lender as Additional Insured | Sometimes |
DSCR Loan Interest Rates
Current DSCR Loan Rates
DSCR Loan Interest Rates Today
To determine DSCR loan interest rates today, you can
DSCR Loan Rates
DSCR Loan Calculator
Tri Merge Credit Report
Prepayment Penalty
DSCR Lender
Best Markets for DSCR Loans
The best market for a DSCR loan depends on your goal as an investor. If you're looking to invest in rental properties in fast-growing markets by population and rent, these are the top 5 markets:
| City | State | Population | Population Growth (2010-2020) | Market Rent Growth (2010-2020) |
|---|---|---|---|---|
| Phoenix | AZ | 1,703,080 | 13.5% | 59.9% |
| San Antonio | TX | 1,547,253 | 22.3% | 55.4% |
| Houston | TX | 2,330,452 | 12.6% | 51.5% |
| Austin | TX | 1,004,698 | 37.8% | 70.5% |
| Fort Worth | TX | 927,704 | 21.5% | 49.2% |
Best DSCR loans
DSCR Loan vs Conventional Loan
DSCR Loan Programs
- DSCR Loan Florida
- DSCR Loan Indiana
- DSCR Loan Maryland
- DSCR Loan New York
- DSCR Loan Ohio
- DSCR Loan Texas
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