DSCR Loan

In order to qualify for a DSCR loan, the property must generate a minimum amount of income and must be a type of commercial property. The borrower must also generally have a credit score of 640 or higher and a down payment between 15%-35%.

Requirements for DSCR loans vary depending on the property type and combinations of factors like your loan-to-value (LTV) ratio, credit score, and down payment amount. However, some general requirements for DSCR loans include:

• A DSCR ratio of one or greater: A DSCR loan uses a DSCR ratio to determine if the property will generate enough income to be eligible. Similar to a debt-to-income ratio (DTI), a DSCR ratio compares the income of the property to its total debt.

DSCR = Monthly rental income / principal + interest + property taxes + homeowners insurance + HOA dues

• Property Type: DSCR loans are generally available for a variety of commercial properties (non-residential) including multifamily, office, retail, industrial, and mixed-use properties. They cannot be used for primary residences.
• Credit Score: While the focus of a DSCR is on the property’s income, a higher credit score of 640 and up will likely be required.
• Down Payment: A down payment of 15%-35% is generally required for a DSCR loan, depending on the type of property as well as other factors.
• Loan-to-Value (LTV) Ratio: The LTV, which is the loan amount divided by the property’s appraised value, is usually capped at 75%-80%.
• Property appraisal: An appraisal is required to determine the value of the property and potential rental income.
• Minimum loan amount: Many DSCR loans have a minimum loan amount of $100,000.

DSCR loan rates vary based on the changing market, your credit score, the length of your loan term, and other factors. They are generally higher than the rates for Conventional loans, since they are for investment properties and not residential. Other factors that affect DSCR loan rates include:

• Loan amount: Larger loans are riskier for lenders, so they often come with higher interest rates to offset that risk
• Investor experience: Investors with more experience in managing investments properties may qualify for lower rates
• DSCR ratio: A higher ratio may qualify you for lower rates
• LTV: A higher LTV ratio often results in higher interest rates
• Prepayment penalties: Loans that have prepayment penalties often have higher interest rates to offset the potential loss for the lender

Like all loans, DSCR loans have pros and cons. Some of the pros include, their property income requirement, flexibility in use, and longer terms lengths. Some of the cons include, their higher interest rates and down payment requirements.

The pros and cons of DSCR loans should be considered and applied to each borrower’s unique goals and financial situation.

Pros of DSCR loans

Several pros of a DSCR loan include: 

• Non-traditional income requirements: The main advantage of a DSCR loan is that it focuses on the cash flow of the property, not the borrower’s personal financial history or employment.
• Property options: DSCR loans are available for many types of commercial properties and can be used for a wide range of real estate investments.
• Longer loan terms: DSCR loan terms range from 5-40 years. Longer loan terms can result in lower monthly payments and better cash flow management.

Cons of DSCR loans

Several cons of DSCR loans include: 

• Higher Interest Rates: The interest rates on DSCR loans are often higher than traditional home loans.
• Minimum DSCR requirement: The investment property must meet the minimum DSCR ratio requirement mentioned above. Usually the ratio must be greater than one to qualify.
• Higher Down Payment: DSCR loans typically have a higher down payment of between 15%-35% depending on the loan type and other factors.

A DSCR loan can be valuable tool for investors and business owners who want to finance income-generating commercial investment properties. With property-focused income requirements, these Non-QM loans offer flexibility and the potential for higher loan amounts.

If a DSCR loan sound like it might be right for your needs, reach out to a New American Funding loan officer today.