An Investor's Guide to DSCR (Debt Service Coverage Ratio) Loans
Debt Service Coverage Ratio (DSCR) loans use a property’s capacity to generate revenue to determine eligibility. Discover the principles of DSCR loans, pros and cons, and how to decide if this program fits your portfolio strategy below.
What Are Debt Service Coverage Ratio (DSCR) Loans?
Use projected cash flow to determine eligibility
With a DSCR loan, eligibility is based on the revenue-generating potential of a property. This lets investors finance properties that don't meet traditional mortgage criteria now, but may generate future profit.
Do not require extensive proof of personal income
Conventional mortgage programs generally require investors to submit multiple tax returns, W-2s, bank statements, and other personal financial records. DSCR loans typically do not.Â
Ideal for investors with multiple properties
For investors with multiple properties, DSCR loans offer financing on a per-property basis. Your debt-to-income factored in as long as each asset can generate enough revenue to cover loan payments.
What Can Debt Service Coverage Ratio (DSCR) Loans Be Used For
To purchase investment property
If you're in the market for a new rental home, multifamily building, or other income-generating real estate, a DSCR loan may be a good fit.
To refinance an existing mortgage
DSCR loans can also be used to restructure debt on investment properties that are generating revenue. This can allow investors to take on additional properties or direct funds towards strategic growth.
To cover property improvements
With a DSCR loan, investors can use the property's current or projected income to qualify for rehab financing and position themselves to increase their ROI over time.
Pros
- Accepts borrowers with atypical financial profiles
- Minimal personal financial documentation required
- Eligibility based on a property's projected revenue
- Potential for larger loan amounts with strong DSCR ratios
Cons
- May have minimum net operating income (NOI) requirements
- May require cash reserves for taxes and insurance
- Not suited for primary residencesÂ
Talk to our mortgage experts today about finding the right loan for you.
Alternatives to a DSCR
Commercial Mortgage-Backed Securities (CMBS)
- CMBS combines multiple commercial loans into a single, tradable security
- Typically used for high-value commercial properties like office buildings and retail centers
- May offer longer-term, fixed-rate structures compared to other investment financing options
- Cash-out refinancing lets investors tap into the equity of their assets
- Replaces an existing mortgage with a new, larger one and provides the difference in cash
- Funds can be used for purchasing new property, renovating existing assets, and covering the cost of growthÂ
- Non-qualified mortgages (QM) are designed for borrowers who do not meet traditional lending criteria
- Accepts alternative income documentation like profit-and-loss statements (P&Ls)
- Caters to niche financing needs
How Do I Know If a DSCR Is Right for Me?
You’re scaling up your real estate portfolioÂ
If you already own real estate, a DSCR loan allows you to qualify based on the income potential of the new property. This program is ideal for active investors who are acquiring multiple properties in a shorter timeframe.
Your investment property will produce enough cash flow to cover monthly loan payments
If the projected revenue of the property you want to buy appears high enough to cover monthly mortgage payments in full, a DSCR loan could be a good fit.
You have complex personal finances that may not align with standard underwriting guidelines
Since underwriting for a DSCR loan focuses on a property's cash flow potential, investors with complicated financial backgrounds can avoid the hassle of traditional income documentation.
When Is the Best Time to Take Out a Debt Service Coverage Ratio (DSCR) Loan?
The best time to take out a DSCR loan is when the property you want to invest in generates or is expected to generate enough income to cover the cost of the mortgage and then some.
For example, if you want to purchase an occupied multi-family rental that already has long-term tenants, or you’re rehabbing a run-down restaurant with a local fan base, you may want to use a DSCR loan for this purpose.
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FAQ
How is DSCR calculated?
What documents are required when applying for a DSCR loan?
Can investors use DSCR loans to acquire multiple properties at once?
Are there any fees associated with a DSCR loan?
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