What Is A DSCR Loan?

A DSCR loan is a commercial real estate loan based on the property’s ability to generate income and cover its debt.  DSCR stands for debt service coverage ratio. 

The operating income can be an appraised value in the case of the purchase of a new property. For existing rental properties lenders will want to see financials for the last 12 months.

Lenders do not look at a borrower’s personal income or job history.

Pros

  • Focus on Property Income: DSCR loans are based on the income of the property. This is great for investors with fluctuating personal income.
  • Easier Qualification: Many investors who do not qualify for traditional loans find it easier to qualify for a DSCR loan.
  • Lower Documentation Needs: Since the loans are based on the property’s ability to generate income lenders do not need a lot of the paperwork they need for traditional mortgages.
  • Good For Large Portfolios: Each property is evaluated on its own making it easier to acquire multiple properties.

Cons

  • Higher Interest Rates: DSCR loans often come with higher interest rates than a traditional mortgage.
  • Property Must Be Income-Producing: If the property doesn’t generate enough income it is difficult to secure financing.
  • Vulnerability to Market Fluctuations: The property’s income, and its ability to cover the loan, is susceptible to market changes.
  • Property Maintenance and Management: Property maintenance and management are needed to ensure consistent rental income.

Example

An investor wants to buy a rental property for $1,000,000. He puts down 20% and finances the other $800,000. The interest rate is 6.7% so the annual debt service is $61,944.

For a lender the ideal ratio of income to debt service is 1.25. In this case the appraised net income (rental fees minus operating expenses) should be $77,430 per year. Those loans are easy.

However some investors can find undervalued properties or operate better than others.

In these cases Launch financial can get investors DSCR loans when the ratio is only 0.75. This is ideal for investors who are better than average.

FAQ

Typically it is the property’s rental income documentation, such as current lease agreements or a market rental analysis. Additionally, the lender may request property-related financial statements, like operating income and expense reports. Personal financial documents, such as credit history, may also be needed, although the emphasis is less on personal income and more on the property’s income potential.

Usually 20% but in some cases it can be as low as 15%.

Typically $100,000 USD.

620

See Full FAQ