OfferMarket

DSCR Loan Program


What is a DSCR Loan?


A DSCR loan or "rental loan" is a mortgage loan for a rental investment property. DSCR stands for Debt Service Coverage Ratio, which is a metric that looks at the rental income, operating expenses and mortgage expenses. For more detail, see 'How to calculate DSCR' section below.


Many commercial lenders (private lenders, banks), require a minimum DSCR in order to qualify for a given loan-to-value (LTV). For example, OfferMarket Capital's DSCR loan program requires a minimum DSCR of 1.2 for single family rental properties.


DSCR loans are asset-backed typically with a personal guarantee from the borrower(s) and based on the following:


  • subject property DSCR
  • borrower's rental investing experience
  • borrower's credit score and personal financial net worth

DSCR Loan Interest Rates


Our DSCR Loan Index tracks the prevailing interest rate and fees from private lenders across the United States. See how OfferMarket's DSCR terms compare:




DSCR Loan Term


The most common DSCR loan term is a 30 year fixed rate. Lenders commonly offer 5, 7 and 10 year ARMs as well.


DSCR Loan Types


DSCR loan types include:

  • Purchase
  • Refinance (rate term)
  • Refinance (cash out)
  • Portfolio
  • Multifamily Term

DSCR Loan: Purchase


If you're purchasing a rental property, you can use a DSCR loan. If the property is vacant, the lender will require the appraisal to include a rent schedule to establish the market rent in order to calculate the DSCR and confirm the LTV that the property qualifies for.


When the property is vacant, it's common for lenders to use 90% of the market rent. So if market rent is $2,000, qualifying rent would be $1,800. This can easily reduce the LTV you qualify for, and bring max LTV out of reach -- it's something all rental investors should be aware of.


DSCR Loan: Cash Out Refi


Cash out refi is commonly used by rental investors who have built up substantial equity over time through appreciation and pay-down of their previous mortgage loan. Cash out refi is also used for what we refer to as BRRR Loans. This is the strategy to use a Bridge Loan to buy, rehab and rent a property, and then a DSCR Loan to cash out refinance, with the goal of pulling out all of the initial capital invested into the deal to optimize cash on cash returns.


DSCR Loan: Portfolio


Many real estate investors want to be able to purchase or refinance 2 or more rental properties in one loan. This is called a portfolio loan and is commonly used for cash out refi. Lenders typically require all of the properties to be in held in the same LLC, and each property within the portfolio needs to meet program guidelines for minimum loan amount, DSCR.


DSCR Loan: Multifamily Term


Multifamily Term loans use DSCR to determine LTV eligibility. Lenders may require slightly higher DSCR for multifamily (5+ unit) LTV eligibility, and max LTV may be slightly lower than single family (1 - 4 unit) guidelines.


Who uses DSCR Loans?


DSCR loans are used by experienced real estate investors who:


  • do not have a W2 (salaried employment) and therefore do not qualify for a conventional mortgage for an investment property
  • do not have tax returns available

How to Calculate DSCR


There are two ways that DSCR is calculated:


Method 1: NOI ÷ Debt Service


NOI = Rent - Taxes - Insurance - Utilities - HOA - Property Management - Maintenance


Debt Service = Mortgage Principal + Mortgage Interest


For example, you have a property with the following conditions:


  • Annual Rent: $24,000
  • Annual Taxes: $5,000
  • Annual Insurance: $1,000
  • Annual Utilities: $0 (paid by tenant)
  • Annual HOA: $0
  • Annual Property Management: $0 (self managed)
  • Annual Maintenance: $1,500
  • AS IS Value: $250,000
  • Interest Rate: 4.75%
  • LTV: 75%
  • Loan Term: 30 years

NOI = $24,000 - $5,000 - $1,000 - $0 - $0 - $1,500 = $16,500


Debt Service = $978.09 x 12 = $11,737.08


DSCR = $16,500 ÷ $11,737.08 = 1.4


Method 2: Monthly Rent ÷ PITIA


PITIA = Principal + Interest + Taxes + Insurance + Association Fees


Using the example above:


DSCR = ($24,000 - $5,000 - $1,000) ÷ $11,737.08 = 1.25


As you can see from these examples, the DSCR value is different -- it's important to understand how your lender calculates DSCR to avoid confusion and frustration. The second example does not factor in operating expenses such as property management, utilities and maintenance yet it still produces a lower DSCR.


Learn more about DSCR in our Real Estate Glossary.


DSCR Loan Guidelines


This table should give you a better idea for the guidelines of the typical DSCR Loan program. This example is taken from OfferMarket Capital, our private lending division.


Guidelines: Individual Rental Property Loans
Interest Rates 30 year conventional + 0.5% to 2%
Interest Rate Buydown 0.25% for 1 point
Origination Fees 1 point (1% of loan amount)
Property Types Single family (1 - 4 units), townhomes, PUD, warrantable condos, eligible mixed use
Loan Amounts $75,000 - $2,000,000
Loan Types: Fixed Rate Mortgage 30 year (fully amortizing)
Loan Types: Adjustable Rate Mortgage 5/1, 7/1, 10/1 hybrid ARM (partial interest only or fully amortizing)
Maximum LTV for purchase or rate term refinance 80% LTV
Maximum LTV for cash out refinance 75% LTV
Maximum Loan To Cost if owned less than 3 months: 80% of total cost basis
Maximum Loan To Cost if owned 3 - 6 months: 5% haircut on max LTV
Minimum Guarantor FICO 680
Ownership LLC (preferred), Corp, Personal (requires exception)
Recourse Full recourse
Minimum Debt Service Coverage Ratio (DSCR) 1.2
Leased Units DSCR Lower of in-place rent and market rent
Vacant Units DSCR 90% of market rent (purchase loans only)

Have any questions about DSCR loans? Use the chat message feature on the bottom right of your screen an a member of our private lending team will assist you.


Private Lender Information


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