Also known as a debt service coverage ratio loan, a DSCR loan uses a formula created by portfolio lenders to measure a rental property’s income, versus the proposed costs of the loan being offered. These loans are then kept in a lender’s portfolio, rather than in a bundle that involves them being sold off, as you would typically see with conventional lending and loaning services.
A DSCR loan measures a property’s income via DSCR instead of using a borrower’s personal income to make the calculations. Here’s where the many benefits of using rental property calculators come to the surface.
Many companies using debt-service coverage ratio loans have seen great success in the last decade. You will not be giving out pay stubs and other sensitive credit and income info to lenders, which gives you more flexibility surrounding how you will use your DSCR loan in the future.
Conversely, the potential lenders will instead do a thorough inspection, and then valuation, of the property that you’re either buying or refinancing. The current rental market can have massive ramifications for this step, so knowing when to go about securing and seeking a DSCR loan is crucial to success.
Many intelligent borrowers have been finding great success in the real estate market via this method, however, so it should be taken seriously. Few other options will get you a positive property cash flow as quickly as the DSCR loan process, after all.
How to Qualify for a DSCR Loan
To take advantage of the amazing nature of DSCR loans, you’ll need to understand the core requirements. Doing so will ensure you do not set yourself up for heartbreak when seeking a DSCR loan. While they are easier to secure than traditional loans, some key documents and info are still needed.
Firstly, creditors will almost always request your credit history. Since DSCR loans are looser in how they’re defined, knowing that a potential borrower has a history of paying back loans is key for lenders. Most lenders will require you to have (at least) a credit score of 660. To get quality access to DSCR loans, however, it will be much easier for you if your credit score is 700 or higher.
Once you prove your credit security, you’ll need to have the lenders send out their hired appraiser to determine the value of the rental property you’re looking at. This will help them determine the best value DSCR loan offer possible. Bank statements proving that you’re receiving consistent income are also typically considered a requirement for most DSCR borrowers.
Lastly, you’ll need to secure a down payment, as nearly all DSCR loans will require you to pay between fifteen to thirty percent of the loan upfront. Because the loan is higher risk, the upfront down payment becomes crucial for proving that a borrower has the cash flow to pay their loan back later on.
The 5 Pros of DSCR Loans
DSCR loans are accessible, amazing, and adventurous. Those who want to finally join the real estate game will find them to be incredibly attractive. Five key pros to DSCR loans make them perfect for anyone looking to invest in rental properties:
1. Legal Entities are Welcome
Portfolio lenders allow both individuals and LLCs to request DSCR loans. Due to this, those looking to create a wide real estate portfolio, and potentially build a career out of the practice, will love DSCR loans.
2. They are Quick to Get
Compared to the much lengthier process typically associated with real estate loans, the simpler process of DSCR loans makes them much faster to get. You’ll simply need to provide some basic income and credit information to get rolling on the appraisal, and then the loan approval process.
3. Personal Income is Not a Factor
While you’ll have to prove that you have a consistent cash flow into accounts associated with your DSCR loan, this does not mean that personal income is a key factor in obtaining one. You’ll simply need to have the cash to pay the down payment, and some steady cash flow to succeed.
4. You Avoid Credit Reports
Although you’ll need a solid credit score to secure a DSCR loan, simply pursuing one will not impact your credit history report. For those that are just starting off with their credit history, or who are dipping their feet into the real estate game for the first time, this can be a godsend.
5. Higher Maximum Loan Amounts
Lastly, you’ll get access to way higher loan amounts by using the DSCR loan process. The more valuable the property you’re getting a loan for is, the higher the potential maximum loan amount will become.
