What is a DSCR Loan?
A DSCR loan, or Debt Service Coverage Ratio loan, is a type of commercial loan that is based on the borrower's ability to repay the loan. The lender calculates the borrower's DSCR, which is the ratio of the borrower's net operating income to their debt service payments. The higher the DSCR, the more likely the borrower is to be approved for the loan. The benefits of a DSCR loan include lower interest rates, longer repayment terms, and higher loan amounts.
Property Types
Single Family: Stick build single unit residential dwelling.
Multi-Unit: Properties with 2-200 units.
Mixed Use: Properties with more than 50% residential and the remaining percentage used for commercial purposes.
Pros
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Focus on Property Income: DSCR loans are based on the income of the property. This is great for investors with fluctuating personal income.
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Easier Qualification: Many investors who do not qualify for traditional loans find it easier to qualify for a DSCR loan.
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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.
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Good For Large Portfolios: Each property is evaluated on its own making it easier to acquire multiple properties.
Cons
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Higher Interest Rates: DSCR loans often come with higher interest rates than a traditional mortgage.
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Property Must Be Income-Producing: If the property doesn’t generate enough income it is difficult to secure financing.
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Vulnerability to Market Fluctuations: The property’s income, and its ability to cover the loan, is susceptible to market changes.
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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.
The property will rent for $6,500 per month, or $78,000 per year (the property's income).
For a lender, the ideal ratio of income to debt service is 1.25% or higher. In this case, the DSCR is 1.2592% ($78,000/$61,944). which will result in more favorable loan terms.
However, a DSCR of 1.25 or higher is often not possible to achieve. In these cases, Launch Financial Group can get investors DSCR loans with a ratio as low as 0.75 or, in some cases, even lower.
