If you’re a real estate investor (REI) looking to grow your rental portfolio, you’ve likely heard about DSCR loans. This financing option has gained immense popularity for its flexibility and simplicity, particularly among investors using a buy-and-hold strategy. But while DSCR loans can be a powerful investing option, they also come with their own set of nuances.
To help you make an informed decision, we’ve compiled answers to 10 frequently asked questions about DSCR loans. By the end, you should have a better understanding of whether this loan type fits your investment strategy.
A DSCR loan is a type of real estate loan designed specifically for investment properties. Unlike traditional loans, DSCR loans don’t evaluate your personal income to determine eligibility. Instead, they focus on the rental property’s cash flow.
Simply put, DSCR lenders look at how much the property can generate in rental income compared to how much the borrower owes in loan payments. These loans are ideal for real estate investors who want to scale their rental portfolios without being bogged down by the requirements of traditional mortgage loans.
DSCR stands for Debt-Service Coverage Ratio, a key metric used to measure a property's ability to generate enough income to cover its debt payments.
Here’s how it’s calculated:
DSCR = Rental Income / PITIA
Rent refers to the total rental income a property generates and can be determined by an appraisal, existing lease value, or other market data. PITIA stands for Principal, Interest, Taxes, Insurance, and HOA payments, encompassing all key components of your expenses.
For example, if a property earns $1,500 in gross rental income monthly, with loan payments of $1,000 and operating expenses (such as taxes and insurance) totaling $250, the DSCR is 1.2X ($1,500 ÷ \[$1,000 + $250]).
Many lenders consider a DSCR of 1.25X or higher ideal, as it indicates the property generates 25% more income than it owes in debt payments. However, lenders specializing in DSCR loans, like Kiavi, may finance rental properties with a DSCR of as low as .8X.
DSCR loans are a fantastic option for real estate investors aiming to expand their rental portfolios. Whether you’re an experienced mogul or just getting started, these loans are especially well-suited for:
DSCR loans offer several advantages, making them a preferred choice for many real estate investors:
What Credit Score is Needed for a DSCR Loan?
While the exact requirements can vary by lender, many DSCR loan providers can mandate a minimum credit score. The higher your credit score, the better terms (like lower interest rates) you’re likely to receive.
Pro tip: Before applying, consider reviewing your credit report and addressing any potential issues to ensure you meet the requirements.
DSCR loans generally come with minimum property value requirements. For example, some lenders set the minimum property value at $75,000. This ensures that the investment property generates sufficient cash flow to cover debt obligations.
If your investment property falls below this threshold, you may need to explore alternative financing options.
One size doesn’t fit all when it comes to DSCR loans. To provide flexibility, lenders often offer a variety of options, such as:
Each loan type has its own pros and cons, so it’s worth discussing these options with your lender to determine which best suits your goals.
The DSCR can play a critical role in determining whether your loan is ultimately approved. Lenders use this metric to assess risk. For example:
Simply put, a higher DSCR generally means lower risk for the lender, and it may improve your chances of getting approved with better terms.
Applying for a DSCR loan is typically straightforward. Here’s a general step-by-step:
As DSCR loans become more widely used, it’s helpful to understand a few common misconceptions that circulate in the market:
Myth: DSCR loans are only for distressed properties.
Reality: Many DSCR loans go toward stable, high-performing rental properties.
Myth: They’re for borrowers with bad credit.
Reality: While DSCR loans are more forgiving of low credit scores than traditional loans, many DSCR borrowers have strong credit and simply prefer the ease and flexibility of this type of loan to scale their business.
Myth: The application process is complicated.
Reality: DSCR loans simplify applications by skipping income verification steps.
Understanding these myths vs. realities can help you evaluate if a DSCR loan could align with your goals.
Real estate investment doesn’t need to be complicated. With a DSCR loan, you can secure the financing you need without all of the hurdles of conventional funding. Whether you’re exploring refinancing options or purchasing your next rental property, Kiavi is here to support you at every step.
Want to see how a DSCR loan can work for your next property? Contact Kiavi today to learn more or get started with a personalized loan estimate.