Last updated: April 15, 2024
A key differentiating factor of DSCR loans is how qualification is determined. Unlike traditional loans, which primarily evaluate your personal income (W-2, pay stubs, tax returns), DSCR loans are unique because they focus on the property's cash flow and ability to generate sufficient rental income to cover the mortgage payments.
DSCR stands for Debt Service Coverage Ratio. It is calculated as follows:
DSCR= Gross Rental Income / PITIA (Principal, Interest, Taxes, Insurance, Association fees)DSCR=PITIA (Principal, Interest, Taxes, Insurance, Association fees)Gross Rental Income.
OfferMarket and most DSCR lenders require a minimum DSCR of at least 1.0, meaning your property must generate enough monthly rental income to fully cover your monthly mortgage payments. In many cases, lenders prefer a slightly higher DSCR (e.g., 1.1 or 1.2) for borrowers with lower credit scores or to qualify for more favorable terms and interest rates
Standard DSCR loan programs, including those offered by OfferMarket, do require a down payment. There are no standard DSCR loan options that offer financing without a down payment. Typically, down payments for DSCR loans range from 20-35%, though the absolute minimum down payment requirement usually falls between 15%-20%. Most institutional lenders, including OfferMarket, cap their maximum LTV at 80% for purchase transactions and 75% for cash-out refinance transactions for borrowers with a credit score of 720 or higher.
The largest and most competitive institutional investors who buy DSCR loans consistently enforce these guidelines, requiring borrowers to have “skin in the game” as part of their underwriting approach. This means you’d generally need a minimum down payment of around 20% to qualify for competitive rates and terms.
The reason why no down payment loans are not available is because of the risk of negative equity. At 0% down payment, you start with 0% equity in the home. Equity is the difference between market value and loan amount. If the market value of your home goes down, and you need to sell the home, you would need to bring cash to the closing table. This very real risk can be eye-opening with an example.:
When the scenario above plays out, many borrowers decide to walk away and let the lender foreclose on the house.
A no down payment loan in a rising market can perform well and quickly from from 100% LTV at origination to a safe CLTV (current loan to value). Let's take a look:
When taking on high LTV debt, it's important to understand how your amortization schedule affects that rate at which you accumulate equity in an event your home value does not appreciate. A $200,000 property with a $200,000 loan on amortizing over 30 years will provide you with just $10,765.13 of equity by the end of year 5. A 15 year amortization schedule will provide you with $43,808.16 of equity over the same timeline. The tradeoff, of course, is that the monthly payment will be $455.59 higher in the 15 year amortization schedule.
For purchase transactions using a DSCR loan, DSCR lenders need to verify that you have enough liquidity to cover the following:
For liquidity verification, you can provide:
You do not need to move funds from any account and you do not need a business bank account.
While some DSCR lenders may advertise options as low as 15% down (85% LTV), this is typically not a competitive or practical scenario for most real estate investors. OfferMarket and similar reputable DSCR lenders maintain that 20-35% down payments are standard, with the minimum acceptable down payment typically being 15%-20% depending on borrower qualifications and property specifics.
Practically speaking, OfferMarket's DSCR guidelines specify clearly defined LTV limits based on your credit score:
LTV | Credit Spread |
---|---|
50 | 3.25% |
55 | 3.3% |
60 | 3.35% |
65 | 3.375% |
70 | 3.4% |
75 | 3.5% |
80 | 4.0% |
The credit spread in the table above may vary based on DSCR lender, prepayment penalty, number of units of the subject property, and market pricing demanded by investors that buy DSCR loans.
The credit spread is often referred to as the "risk premium" that institutional DSCR loan investors demand to receive above the benchmark "risk free" rate, which is typically the 5 Year US Treasury. Institutions that buy DSCR loans view higher LTV as riskier because the borrower has less equity in the property to provide protection in the event home prices decline and/or the property needs to be sold or foreclosed on.
Learn more about DSCR loan interest rates.
💸 negative cash flow -- consistently monthly losses, high financial stress 📉 high default risk -- inability to meet debt obligations 💸 bankruptcy, foreclosure -- personal guarantee required
Most DSCR lenders require a minimum DSCR of 1.0. That means the property generates exactly enough rent to pay the monthly mortgage payment (principal, interest, taxes, insurance). If the property requires maintenance or administrative work, that means you'll be losing money.
A DSCR of 1.1 means you generate a 10% cash flow margin above your monthly mortgage payment. Borrowers with credit scores of 720 or higher will qualify for the most competitive rate when their rental property has a DSCR of 1.1 or higher.
A DSCR of 1.2 means you will generate a 20% cash flow margin and may be required for borrowers with credit scores that are below 720 or 700 (depends on the program).
Interest rate directly affects DSCR. The higher the interest rate, the lower the DSCR. In an elevated interest rate environment, in many markets, it is common for the DSCR to be too low at max LTV.
DSCR | Credit score | Rate |
---|---|---|
1.0 | 700+ | Uncompetitive |
1.1 | 720+ | Competitive |
1.2 | 680+ | Competitive |
Besides cash flow (DSCR), OfferMarket also evaluates several other important criteria for qualification: