DSCR Loan No Down Payment

Last updated: April 15, 2024

What are DSCR loans and how do they work?

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

Can you get a DSCR loan with no down payment?

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.:

• Purchase price: $200,000
• Loan amount: $200,000
• Market value after 10% downturn: $180,000
• Equity: -$20,000
• Closing costs to sell: $15,000
• Cash from borrower at settlement: $35,000

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:

• Purchase price: $200,000
• Loan amount: $200,000
• Market value after 10% appreciation: $220000
• Equity: $20,000
• Closing costs to sell: $15,000
• Cash to borrower at settlement: $5,000

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.

DSCR loan liquidity verification

For purchase transactions using a DSCR loan, DSCR lenders need to verify that you have enough liquidity to cover the following:

• down payment
• closing costs
• 9 months of mortgage payments ("reserves")

For liquidity verification, you can provide:

• 2 most recent business bank statements, and/or
• 2 most recent personal bank statements, and/or
• 2 most recent brokerage account statements, and/or
• 2 most recent retirement account statements, and/or
• 1031 exchange escrow statement

You do not need to move funds from any account and you do not need a business bank account.

What is the minimum down payment for a DSCR loan?

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:

• Up to 80% LTV for purchase transactions (with minimum 20% down payment) if your credit score is 720 or higher.
• Up to 75% LTV for cash-out refinance transactions under similar credit conditions.
• Lower LTV limits (such as 65% maximum LTV for credit scores between 660-679) apply, requiring a higher down payment or equity contribution for borrowers with lower credit scores.
  

DSCR Loan Rates by LTV

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.

What are the risks of high LTV DSCR loans?

💸 negative cash flow -- consistently monthly losses, high financial stress
📉 high default risk -- inability to meet debt obligations
💸 bankruptcy, foreclosure -- personal guarantee required

DSCR loan LTV insights

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.

Other Key DSCR Loan Qualification Criteria:

Besides cash flow (DSCR), OfferMarket also evaluates several other important criteria for qualification:

• Minimum credit score requirement typically starts at 680. However, borrowers with scores as low as 660 may still qualify, but with lower LTV limits and potentially higher interest rates.
• Liquidity Verification: You must demonstrate sufficient funds to cover the down payment, closing costs, and typically 9 months of mortgage payment reserves. Acceptable proof includes recent personal or business bank statements, brokerage accounts, retirement account statements, or 1031 exchange escrow statements.
• DSCR loans are specifically designed for non-owner occupied investment properties only. They must serve a clear business purpose and cannot be used for your primary residence.