DSCR Loans: A Guide for Smarter Real Estate Investment

Debt-Service Coverage Ratio (DSCR) loans are a type of mortgage for rental property investments. Unlike traditional loans, DSCR loans focus on the income the property makes instead of the personal income of the borrower. The DSCR is calculated as follows:

DSCR = Monthly Rent ÷ PITIA

PITIA accounts for principal, interest, taxes, insurance, and association dues. Considering all of the associated expenses allows an investor to more accurately determine if a property will have positive cash flow, making it a good buy-and-hold opportunity.

While PITIA is preferred for its simplicity, NOI (net operating income) is another formula that could be used to calculate the cash flow of a property after expenses.

In either scenario, taking the time to do this calculation will help you to properly assess the financial potential of an investment property.

Real estate Investors favor DSCR loans, generally available with a minimum credit score of 680, a 20 to 25 percent downpayment, and a debt service coverage ratio of 1.2 or greater.

DSCR lenders allow investors to utilize property-generated income to acquire additional properties and expedite portfolio growth. Investors can also use DSCR loans for a cash-out refinance on the other existing properties in their portfolio, freeing up cash for down payments. In an ideal scenario, investors will end up with multiple properties where they no longer have their own capital invested, thanks to investor-friendly lending programs.

Compared to traditional loans, DSCR loans come with a range of benefits. The property-centric qualification criteria level the playing field, allowing investors to access financing opportunities that may have been otherwise elusive. Moreover, the loan application process for DSCR loans is generally faster and more streamlined, potentially expediting approval times. This efficiency can be especially advantageous for investors looking to seize timely opportunities in the real estate market or execute rapid portfolio growth strategies.

To prepare for a DSCR loan, you need to understand your property's income and expenses. Make sure the property's income is enough to cover its debts, and be realistic about how much money the property will make and how much it will cost to maintain. To qualify for a DSCR loan, borrowers typically need a sufficient property income, a minimum DSCR of 1.2 to 1.25, a property appraisal to confirm its value and condition, borrower experience in property management, a good credit history, and possibly financial reserves for unforeseen expenses or vacancies.

*source: https://www.nasdaq.com/articles/dscr-loans