Everything Brokers Need to Know About DSCR Loans for Rental Properties

DSCR loans are an incredibly powerful tool that investors can use to fund real estate deals in more scenarios than when using conventional mortgage loans. They provide many advantages including a less-stringent application that isn’t reliant on personal income, faster closings, and more flexible repayment options. As a broker or lending partner, offering DSCR loans helps you fund a wider range of investments and positions you as a one-stop shop for clients struggling to secure real estate financing.

Have you been thinking about adding DSCR loans to your product offerings? Here’s everything you need to know about them, and how to maximize their effectiveness with your investor clients.

Q1: What is a DSCR loan, exactly?

DSCR stands for Debt Service Coverage Ratio, or in other terms, the ratio of monthly income provided by a property divided by its total monthly debt service. DSCR loans are a form of real estate finance offered by private lenders that operate in the investment space, and they use DSCR to accurately assess a borrower’s ability to repay the loan. Since loan approval is based on a property’s cash flow, and not the applicant’s personal income or credit history, they are often easier to qualify for than traditional financing options.

Q2: How is DSCR calculated?

As we mentioned, DSCR is the ratio of monthly income obtained from a property divided by its total monthly expenses. The formula can be expressed as:

DSCR = NOI / Debt Service

In the formula, Net Operating Income can be calculated by taking monthly rental income and subtracting simple monthly expenses (including property taxes, insurance, property maintenance and repairs, utilities, and maintenance fees). Debt service is just the total of the monthly mortgage payment (or principal + interest, if you want to get more granular). When securing financing for your clients, DSCR should be above 1.00, since it means there is enough income to cover debt obligations. Ideally, lenders will be looking for a ratio of 1.05 or above, as this signifies a healthy profit margin after all expenses have been considered.

Q3: Why do real estate investors prefer DSCR loans?

DSCR loans are often easier to qualify for than conventional mortgage loans, and they can be approved much faster, which can be incredibly beneficial in the competitive investment landscape. Personal income is less of a factor for loan approval, as property cash flow is the main determining factor. This allows investors to secure financing even if they have less than perfect credit or non W-2 income. Unlike FHA loans, there are also no limits on the number of properties which can be financed using DSCR loans.

Q4: What property types are eligible for DSCR loans?

There are a number of property types that are eligible for DSCR financing; they aren’t just limited to single-family rentals. Multifamily properties are also eligible for DSCR loans, and they tend to have even healthier DSCR ratios than single-family homes which makes them easier to find financing for. Additionally, private lenders are more flexible when it comes to mixed-use properties, so long as most of the property is used for residential purposes. Certain lenders may even offer financing programs for short-term rental investments, such as Airbnbs.

Q5: What are the typical borrower requirements?

Regarding the terms used to qualify borrowers, personal income is less of a factor with lenders mainly focusing on DSCR for loan approval. Most lenders will have a minimum DSCR requirement for their loans, which ranges from 1.05 – 1.20 depending on the lender. Although credit is less of a factor in loan approval, most lenders will still run a credit report for the borrower(s), and may use this number to determine specific loan terms. Lenders also like to see previous experience with rental property investing, but this is not typically a strict requirement.

Q6: What are the loan terms like?

Breaking down loan terms, most DSCR programs have LTV ratios that range from 70-80%, which means borrowers are expected to bring a down payment of at least 20% to closing. Interest rates are also very competitive, with 30-year DSCR rates in line with the market rate for 30-year mortgages. This helps make it an easy sell when presenting it as an alternative financing option to your clients. Interest rates are flexible however, with many lenders offering adjustable-rate options. Other terms, like prepayment penalties and rate buy-down will vary from lender to lender, so it’s important to discuss these options when choosing a wholesale partner.

Q7: What are some common pitfalls brokers should watch for?

Although DSCR loans provide many benefits over conventional financing options, there are still some pitfalls to keep an eye out for. While their rates are very competitive when compared to standard mortgages, they are still slightly elevated, and it’s worth taking these extra costs into consideration when estimating investment returns. Not every private lender is created equally, either. You and your clients will be better off working with a wholesale partner that specializes in real estate financing, with a proven track record of delivering DSCR financing. An ideal lending partner will prioritize speed and communication, along with broker-friendly loan programs and a dedicated support team. In any case, you should take time to discuss program specifics with your chosen lending partner, so neither you nor your clients are met with any surprises.

Q8: How can brokers positions DSCR loans to investors?

In order to present DSCR loans as a viable option to your investor clients, you should focus on the benefits they provide over conventional mortgages. Emphasize the fact that income verification is not required for loan approval, and how they help investors scale real estate portfolios with less limitations. You should also highlight their faster closing times, as this can be a major benefit in competitive real estate markets. Once you have a few successful deals under your belt, you can present these cases as examples of how DSCR loans can help new clients.

RCN Capital

To help your clients maximize the returns on their next investment, partner with a lender that can provide you with the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors and lending partners. If you are looking to offer rental property financing to your clients, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.