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Refinance Rental Property DSCR Loan

If you're looking to refinance your rental property, you need to know about DSCR loans. DSCR loans are a fast-growing loan type designed for real estate investors, especially those without W2 salaried income, who want an easy and streamlined borrowing experience.

DSCR loans are typically 30 year fixed rate mortgages where the loan amount and interest rate is determined based on the cash flow of the rental property (DSCR), and your credit score and rental property investing experience.

DSCR stands for debt service coverage ratio, a simple cash flow metric where 1.0 indicates that the rental property operates at breakeven. A DSCR above 1 means the property generates free cash flow, while a DSCR below 1 means the property does not generate enough rent to cover its mortgage payments. Most DSCR loan programs, including ours, currently have a minimum DSCR of 1.1 to qualify for a given loan amount. As LTV (loan-to-value) increases, your DSCR decreases as a result of increased mortgage payment. This means that when your DSCR hits the minimum, that is your maximum LTV. Enough explaining, here's how to visualize the concept:

minimum DSCR for refinance

Rental property investors refinance their rental properties periodically for the following reasons:

🏚️ get out of a fix and flip loan
💰get cash out of the property
📉 get a lower interest rate and increase cash flow

Can you refinance a DSCR loan

Yes! You can absolutely refinance a DSCR loan, though you will want to make sure you will not be incurring an expensive prepayment penalty.

Prepayment Penalty

Most DSCR loans carry a prepayment penalty. This means you pay a fee if you pay off the loan early. Most DSCR loan prepayment penalties are 3-2-1 or 5-4-3-2-1 "stepdown" penalties where you pay a declining percent of the outstanding principal loan balance as a penalty each of the 3 or 5 years of the penalty period.

For example, let's say you're in year 2 of a new loan with $100,000 remaining balance and a 3-2-1- prepayment penalty and you decide to refinance to pull some cash out using a new DSCR loan. You will need to pay a 2% fee ($2,000) to your lender at settlement when you complete the refi.

Here's a helpful video that explains the prepayment penalty in more detail:

DSCR cash out refinance

DSCR cash out refinance is the primary financing strategy used by BRRR method investors. Regardless of whether you buy your rental property with cash or a fix and flip loan, once you complete your rehab and it's time to pull cash out or refinance into lower interest rate and a longer term, DSCR loans are the easiest way to complete your project so you can move on to the next project without wasting time and leaving cash trapped in the deal.

DSCR loan cash out refinance calculator

To calculate your loan amount and understand how the DSCR calculation will impact your refinance, we recommend using our DSCR Calculator.

Here are the inputs that affect your DSCR, and ultimately impact your loan amount:

💸 Rent

The lower the rent, the lower the DSCR at your target loan amount. We use the lower of actual and market rent so make sure you rent your property for market rent!

💸 Taxes

Taxes can really eat into your DSCR. BRRR strategy often protects against high taxes because the property was bought in distressed condition and the tax assessed value is still a lot lower than the value after repairs. Lower taxes, higher DSCR, higher LTV.

🔥 Insurance

The lower your insurance, the higher your net operating income, the higher your DSCR. Insurance for DSCR loans needs to follow specific guidelines including:

  • Coverage type -- typically DP-3 "Special Form"
  • Dwelling coverage -- typically replacement cost value ("RCV")
  • General liability -- typically $500,000 per occurrence / $1,000,000 in the aggregate
  • business interruption "loss of rent" -- typically 6 or 12 months of coverage so you get paid even if your property is damaged and your tenants need to move out and stop paying rent

We recommend shopping for the most cost effective landlord insurance from OfferMarket Insurance, our in-house insurance agency.

⚡ Utilities

If the owner pays utilities, then it will reduce your net operating income, the higher your DSCR. If tenants pay utilities, they will not be counted so ideally your lease will specify that your tenants pay all utilities (i.e. water, electric, gas).

📈 Interest Rate

Interest rate plays a major factor in calculating your DSCR. The higher the interest rate, the higher the mortgage payment, the lower the DSCR, the lower the LTV you qualify for -- (see chart above).

How long does a DSCR refi take?

A DSCR refi typically takes 30 to 45 days, though we can fund in as little as 15 to 20 days as long as you complete your processing items in your Loan File and we have an appraisal report and clear title.

DSCR refinance cost

The cost to refinance your rental property with a DSCR loan will vary based on which lender you choose to work with.

OfferMarket Other DSCR Lenders
Origination points 0.5 to 2 2 to 4
Underwriting fee $295 - $495 $495 - $995
Legal/doc prep fee $695 to $995 $995
Appraisal fee Market Market
Appraisal review $90 $120 - $175
Title Market Market

DSCR loan cash out refinance

Pulling cash out of your rental property with a DSCR loan can be one of the most practical ways to grow your rental portfolio because the loan term is typically 30 years at a fixed rate that is more attractive than personal or business loans or lines of credit.

DSCR Loan Refinance Guidelines

DSCR guidelines are standardized because most DSCR loans are sold to aggregators who pool DSCR loans into mortgage-backed securitizations. As a result, guidelines are in place to ensure borrowers like you are not taking on too much risk.

Guidelines Refinance
Minimum As Is Value $100,000
Minimum Loan Amount $75,000
Minimum DSCR 1.1
Maximum LTV 75% (cash out), 80% (rate and term)
Rural No
Bank Statements 3 months
Minimum Credit Score 660
Tax Returns, W2 No

No Seasoning Cash Out Refinance

Most DSCR lenders require you to own your property for 6 months ("seasoning period") before they will allow you to refinance. While we understand the reasons for seasoning, we have no seasoning requirement as long as there is proof that you added value to the property, even if it's a light cosmetic rehab. No rental property investor wants to wait around to pull cash out and get on with their next deal -- especially not when there are concerns of home value declines and rising interest rates.

It doesn't matter if you bought the property with cash or a short term loan, there is no seasoning requirement with our DSCR loan program.

DSCR calculator (Will it cash flow?)