DSCR Overview – Loan Programs, Benefits, and How to Qualify

A debt service coverage ratio (DSCR) measures available cash flow in order to pay back any current loans, debt, or obligations. 

Some hard money lenders, like First Equity Funding, offer Debt Service Coverage Ratio, or DSCR, loans for real estate investors. These loans are a type of non-qualified mortgage loan that can help real estate investors easily qualify for a loan because the process easily determines whether or not the borrower can repay the loan, without the need to verify income.

What are DSCR Loans?

DSCR loans are granted if the borrower’s able to repay the loan as a result of the amount of net operating income generated by the investment property. In other words, the higher the DSCR ratio of a borrower, the more net operating income they have available to repay the loan. 

Lenders are able to use the DSCR ratio to analyze if the real estate investment property is making enough money to cover the loan or not. Due to this, investors are able to qualify for a DSCR loan based on the property’s income, as opposed to their own personal income.

Since investors do not qualify based on their income, a DSCR loan is a type of no-income loan. With a DSCR loan, investors are not held to the strict lending requirements of a conventional loan and are able to avoid the often difficult approval process that comes with conventional lending.

How Do Loan Programs Work?

DSCR loan programs are for real estate investors who are looking to qualify for a loan quickly and without the need to verify personal income. The loans only take into consideration the income generated by the investment property instead of reviewing proof of income, tax returns, employment information, etc.

For instance, if a real estate investor is looking to qualify for a loan from a local bank for their next investment property, the lender will need to calculate the DSCR ratio to determine if the property will generate enough income to repay the loan.

What is a Good DSCR Ratio?

Lenders will calculate the DSCR ratio in order to determine if an investor can qualify for this type of loan and if the property will make enough money to repay the loan. If a borrower has a ratio of 1:00, that means the property will generate enough income to repay the loan. Typically, the minimum DSCR ratio for lenders to process a loan is 1:00 to 1:30.

If a borrower has a DSCR ratio of 1:25, then the property would generate enough income to make the loan payments, with some room. A ratio of 1:50 would provide additional room, etc.

Benefits of DSCR Loans

A few advantages of a DSCR loan include:

• No income verification required: making the loans more accessible to borrowers who may not typically qualify for a conventional loan.

• Quicker application and closure times: these loans often have a more streamlined application process due to not having to submit any personal information for verification.

• Unlimited number of properties: some loans may require you to pay off a current loan before you look for a new one. With a DSCR loan, borrowers are able to obtain multiple loans for different properties at the same time.

• A preferred option for both new and experienced real estate investors: a DSCR loan can help new investors begin their rental portfolio. If you’re an experienced investor, these loans can help take your business to the next level.

Additional benefits of DSCR loans are:

• Down payments as low as 20% 

• Interest-only loan options available

• Eligible for both long-term and short-term rental investments

How Can You Qualify?

While new or experienced investors can apply for a DSCR loan, in order to qualify, the investment property’s income must cover – or exceed – the DSCR ratio.

Our application procedure is quick and streamlined. Applying for our DSCR loan will take less time than a standard loan application because we require no DTI or personal income verification and minimum documentation required. Learn more about DSCR Rental Loans with First Equity Funding and apply today!