DSCR Loan Alabama

Last updated: April 15, 2024

Alabama is an attractive market for rental property investors, and DSCR loans are quickly becoming the go-to product for purchase and refinance transactions. Whether you're an experienced rental property investor or just getting started, the easiest way to finance your growing rental property portfolio is with DSCR loans.

What is a DSCR loan?

DSCR stands for Debt Service Coverage Ratio, which is a fancy way of saying cash flow. DSCR is a cash flow metric that tells us how much cash flow your rental property generates above your monthly mortgage payment. A DSCR of 1.0 means your rental property is breaking even and not generating any cash flow. A DSCR below 1 means you are losing money on a monthly basis before factoring in expenses such as property management, maintenance, vacancy. A DSCR above 1.0 means your property is generating cash flow.

While we and other DSCR lenders can offer terms for a DSCR of 1.0, the most competitive DSCR loan terms require a DSCR of 1.1 or higher. If your credit score is below 720, you will likely need a DSCR of 1.2 to qualify for a given loan amount.

Alabama DSCR Loan Interest Rates

DSCR loan rates for Alabama rental properties are in line with the national average. OfferMarket's DSCR Loan Interest Rates Index tracks the prevailing DSCR loan interest rate:

You can get an instant real-time DSCR loan quote that is specific to your property and borrower profile.

Alabama DSCR Loan Pros and Cons

You will notice that DSCR loan interest rates are very competitive with interest rates offered by banks and conventional lenders. There are pros and cons to be aware of as you evaluate financing for your next purchase or refinance transaction. Ultimately, as you compare DSCR loans with other options, it should become abundantly clear that DSCR loans are the best option for nearly all rental property investors.

DSCR Loan Pros

Low doc, no income verification: a DSCR lender should never ask you for W2, pay stubs, or tax returns. There is no income verification and this is a requirement for the army of rental property investors who are self employed. Underwriting is significantly faster for DSCR loans compared to bank loans and conventional investment property loans because there are fewer processing items. We'll review DSCR loan requirements in a moment.

Availability of capital: given the merits of DSCR loans, while the origination volume of DSCR loans is growing fast, it is hardly keeping up with institutional investor demand among insurance companies, pension funds and credit funds that buy DSCR loans. Credit spreads for DSCR loans, the premium above the risk free 5 year treasury, are attractive to investors and competitive relative to bank loans and conventional investment property loans. This is a win-win scenario that provides an element of confidence and certainty that your loan will be funded as long as you and your property meet DSCR loan guidelines.

Competitive interest rates: while many banks are not actively lending, those that are may not be offering the most competitive rates. The prime rate, a measure of what banks are offering prime borrowers, is currently at 8.5% while DSCR loan interest rates are nearly 1% lower.

DSCR Loan Cons

New industry with a lot of noise: given how new the DSCR loan industry is, and how fast it is growing, you can imagine there is a lot of noise. There are mortgage brokers and private lenders that do not specialize in DSCR loans, and they are setting the wrong expectations with borrowers.

Risk of poor borrower experience: Most DSCR lenders have limited experience and therefore will struggle to properly structure your loan to meet your unique goals, and funding timeline. This can be very costly and stressful.

Uncompetitive terms: Many mortgage brokers and private lenders charge extremely uncompetitive interest rates and fees. This is why we created the DSCR Loan Interest Rates Index, and why we emphasize transparency throughout our lending platform -- there should never be surprises when you get to the closing table, but sadly that is the case with many borrowers who are not careful in selecting the best DSCR lender.

Alabama DSCR Loan Requirements

Loan application: required for each member, generally a simple e-sign that authorizes your DSCR lender to run credit report and order your appraisal. Credit report will only be run for the members who will be personally guaranteeing your loan.

Borrowing entity: DSCR loans are business purpose loans, so most DSCR lenders will require that title is held in a business entity -- typically this is an LLC but it can also be a Corporation or Trust. We and most DSCR lenders do not allow the borrowing entity to be an individual.

Credit score: DSCR loans for 1-4 unit residential properties require a personal guarantee from a members representing a minimum ownership interest of 51%+ of the borrowing entity. DSCR lenders use a Tri Merge Credit Report which looks at your credit score from each of the three credit bureaus and uses the middle score (second highest) for underwriting.

In the example above, the qualifying credit score of 732 is used to determine maximum LTV and minimum DSCR.

Bank account statements: otherwise known as "liquidity verification", we need to see that the personal guarantor(s) have enough liquidity to meet standard reserve requirements. Liquidity can be verified by reviewing the two (2) most recent statements. For purchase transactions, we need to verify that you have enough liquidity to cover down payment, closing costs and reserves amounting to 6 to 9 months of mortgage payments depending on your LTV. For refinance transactions, we need to verify that you have enough liquidity in reserve amounting to 6 to 9 months of mortgage payments depending on your LTV.

You can provide business bank account, personal bank account, brokerage account, retirement account, insurance policy cash value and 1031 exchange escrow account. You do not need to move funds from one account to another. Any deposits in your accounts that are 175% over the average deposit amount, over $5,000, will be included in a letter of explanation.

Rent and Security Deposit Receipt: if the property is leased, we will need to review your original lease and any renewal lease, and we will need to verify whether or not there is a security deposit currently held. Many borrowers provide property management ledger, while others complete our simple form.

Common Underwriting Issues for Alabama DSCR Loans

Landlord insurance: given Alabama's proximity to the Gulf of Mexico, there is elevated risk of loss from hurricanes and other powerful storms. Landlord insurance premiums are elevated above the national average which reduces DSCR. The most experienced rental investors are able to implement cost effective landlord insurance that meets strict DSCR loan guidelines. You can shop 40+ carriers in under and save hundreds on landlord insurance with OfferMarket Insurance.

Flood insurance: while flood insurance is only required if your rental property is in a FEMA Special Hazard Flood Zone, that applies to many investment properties in Alabama. When flood insurance is required, it can increase processing time and it reduces your DSCR which may prevent you from qualifying for your target loan amount.

As Is value: in certain markets, including Birmingham and Montgomery, it is not uncommon for rent-ready rental properties to appraise for less than $100,000. The minimum As Is value is $100,000 and it can be difficult to obtain an exception from the institutional investors that buy DSCR loans.