Debt Service Coverage Ratio (DSCR) loans are investment property loans that allow borrowers to qualify based on the property's cash flow rather than their income and assets. This makes them a good option for investors new to real estate or with other debt obligations that would make them ineligible for a traditional mortgage.
Requirements for a DSCR loan:
- Credit score: Lenders typically require a minimum credit score of 680 for a DSCR loan. However, the higher your credit score, the better your interest rate and loan terms will likely be.
- Down payment: DSCR loans typically require a down payment of 20-25% of the purchase price. However, some lenders may offer lower down payment options to borrowers with strong credit and experience with investment properties.
- DSCR score: To calculate the debt service coverage ratio (DSCR), divide the property's monthly rental income by the monthly mortgage payment. Lenders typically require a DSCR of at least 1.1x, meaning the property's rental income must be at least 10% higher than the mortgage payment.
- Property type: Most DSCR loans are available for single-family homes and duplexes. However, some lenders may offer DSCR loans for multi-family and commercial properties.
Besides these essential prerequisites, some lenders might impose extra conditions for DSCR loans, like a minimum property worth or a minimum rental income. Investigating and comparing offers from different lenders is essential to finding the DSCR loan that best meets your needs.
Here are some tips for qualifying for a DSCR loan:
- Make a sizeable down payment. The larger your down payment, the lower your monthly mortgage payment and the higher your DSCR will be.
- Choose a property with a high rental income. The higher the property's rental income, the higher your DSCR will be.
- Get pre-approved for a loan before you start shopping for a property. This will give you an idea of how much you can afford to borrow and your monthly mortgage payment.
- Work with a lender who specializes in DSCR loans. These lenders will be familiar with the requirements for DSCR loans and can help you find the best loan for your needs. Some lenders may also charge a prepayment penalty if you pay off your loan within a certain period, so you may want to look for one that does not charge this fee, like NASB.
If you have any questions about qualifying for a DSCR loan, call one of our DSCR experts at NASB at 855-921-4921 or click here for more information.