9 Pros + 4 Cons

Amresh Singh, CEO - HomeAbroad  by Amresh Singh

7 min read

DSCR ( Debt Service Coverage Ratio ) is a tool to assess the financial viability of income-generating properties.

DSCR loan program is great for you if you are looking for a financing option to invest in. However, knowing DSCR loan pros and cons would be even better! It can help you decide whether it is the right financing option for your investment needs.

Why wait, then? Let’s dive in!

DSCR Loans Pros and Cons

DSCR Loans Pros and Cons

Pros of DSCR Loans

DSCR loans offer several advantages to a real estate investor investing in income-generating properties. Here are some of the benefits of DSCR loans.

1. No Personal Income Check

When applying for a DSCR mortgage loan, you can breathe a sigh of relief knowing that your personal income won’t be scrutinized. That’s right – there’s no need to provide mountains of paperwork or proof of your personal earnings. Instead, lenders are solely interested in the property’s cash flow.

So, if you’re self-employed or don’t have a traditional source of income, a DSCR loan could be a game-changer for you. You won’t have to worry about jumping through hoops to prove your income or being turned down for a loan due to a lack of documentation.

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2. There is No Employment Check

Picture this: You’re a freelance writer or a gig worker and want to invest in a rental property. You’ve got your eye on a fantastic opportunity, but you’re worried that your non-traditional income will disqualify you for a loan.

Well, fear not because with a DSCR loan, your personal income won’t even come into the picture! That’s right, DSCR lenders focus solely on the property’s cash flow and don’t require any employment checks. So, you can invest in that rental property without worries and continue to be your own boss!

3. DTI (Debt-to-Income) Ratio is Not a Qualification Criteria

Conventional mortgages have certain debt-to-income ratio criteria for qualification; DSCR loans don’t consider DTI or any other personal income documents to approve the loan, making it a convenient loan option for people who can’t fulfill conventional mortgage guidelines.

4. No PayStubs Required

DSCR loans do not depend on personal income, so they don’t require paystubs or W2s to assess creditworthiness. Therefore, investors with no employment or income documents can apply for this loan to buy an investment property.

5. Faster Closing

Are you tired of the long and tedious process of getting a conventional loan for your investment property? Well, there’s good news for you! With a DSCR loan, you can skip all the unnecessary paperwork and get your loan approved quickly.

Since DSCR loans are based on the property’s cash flow, lenders don’t need to scrutinize your personal income or employment history. This means the approval process is much faster and more straightforward than a conventional loan.

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6. Enable You to Finance Multiple Properties Simultaneously

Imagine purchasing multiple investment properties at once without worrying about the limitations of traditional mortgage loans. With a debt service coverage ratio loan, you have the freedom and flexibility to finance multiple properties simultaneously, allowing you to build a robust and diversified real estate portfolio much faster.

So, if you’re ready to take your real estate investing to the next level, a DSCR loan may be just what you need to make it happen.

7. DSCR Loans Can be Applied to Different Types of Properties

When it comes to financing your real estate investments, flexibility is key. And that’s where DSCR loans come in. They offer versatility that can help you take advantage of various investment opportunities.

Whether you’re looking to finance a vacation rental property or a commercial space, a DSCR loan can be used. And the best part? You don’t have to go through the hassle of applying for different types of loans for each investment property.

8. DSCR Loan offers Flexible Terms

Since DSCR loans fall under non-QM loans, there are no strict guidelines for qualification. Some lenders may approve your loan even if you don’t meet the typical DSCR loan requirements, such as a DSCR of at least 1 or a credit score of 620 or higher.

However, the decision ultimately depends on the lender, and they may require a larger down payment and impose higher interest rates.

9. DSCR Loans Cater to Novice and Seasoned Investors Alike

Real estate investors who can’t fulfill the conventional mortgage guidelines can use DSCR loans to get financing without personal income verification. So, if you are self-employed, a freelancer, or someone with not-so-perfect financial records, then you can use DSCR loans to finance your investment property.

Cons of DSCR Loans

Even though DSCR loans offer greater flexibility to real estate investors, there are some disadvantages to DSCR you need to be aware of before applying.

Below are some of the cons of DSCR loans:

1. Limited Loan Amount

It’s important to remember that certain DSCR lenders may limit the amount of money you can borrow. That’s why improving your financial profile is crucial, paving the way for increased borrowing power.

2. Higher Interest Rates

DSCR loans typically come with higher interest rates than conventional mortgages. This is mainly because they are perceived as a riskier investment by lenders.

One of the reasons for this is that income-producing properties, typically financed through DSCR loans, are vulnerable to fluctuations in rental income and occupancy rates, making it harder for borrowers to keep up with their loan payments.

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3. Higher Down Payment

With a maximum loan-to-value (LTV) ratio of 75% to 80%, lenders expect you to bring forth a down payment of 20% to 25%.

It’s not just about numbers but a sign of your commitment to the investment. Lenders want to see your financial stake, ensuring you’re fully dedicated and less likely to waver.

4. Borrowers May be Required to have Cash Reserves

You found the perfect rental property and are ready to apply for a DSCR loan. But did you know that lenders may require you to have cash reserves in case of unexpected situations?

When applying for a DSCR (Debt Service Coverage Ratio) loan, borrowers may be required to demonstrate that they have cash reserves available in case of unexpected situations, such as losing a tenant.

This is because the property’s rental income is often the primary source of repayment for the loan. A sudden loss of rental income could impact the borrower’s ability to make loan payments.

Please note not all DSCR lenders ask for cash reserves. It depends on the lender. Do shop around and find the perfect lender for your needs!

5. Prepayment Penalties

When considering a DSCR loan, be aware that prepayment penalties may be possible.

However, not all DSCR lenders ask for prepayment penalties. It really depends on the lender. So, exploring your options and finding a DSCR lender that aligns with your investment goals is essential.

As with any loan type, it’s essential to carefully evaluate the pros and cons of DSCR loans and consult a financial professional to determine if this type of financing is the right choice for your investment needs.

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How to Determine if a DSCR Loan is Right for You?

Here are some situations where a DSCR loan may be the right choice:

1. Real estate investors:

If you are an investor looking to purchase or refinance an income-producing property, a DSCR loan can be appropriate. These loans focus on the property’s cash flow rather than your personal income or creditworthiness.

2. Property developers:

Developers who are constructing or rehabilitating commercial properties can benefit from DSCR loans. These loans can help cover construction costs, renovations, and other expenses during the development process.

3. Business owners:

If you own a business and want to purchase a property for your operations, a DSCR loan can be suitable. It allows you to use the income generated from your business to qualify for the loan, making it advantageous for properties that generate substantial cash flow.

4. Investment property owners:

If you own income-generating properties and want to access equity or refinance existing loans, a DSCR loan can provide the necessary financing.

5. Individuals with limited personal income or credit history:

DSCR loans primarily focus on the property’s income rather than the borrower’s personal financials. This can benefit individuals with limited personal income or credit history but who own properties with strong cash flows.

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DSCR loans can be a valuable financing option for income-generating properties, particularly for investors looking to expand their investment portfolios. However, they have potential drawbacks, such as higher interest rates and limited financing.

It’s important to carefully evaluate the pros and cons of DSCR loans before deciding and to ensure that your financials are in good shape before applying for this type of loan.

HomeAbroad can assist you in finding the most suitable DSCR loan lenders.

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Connect with the Best DSCR Lenders

Get quotes from multiple lenders to compare and pick the best one!

Frequently Asked Questions

  1. Is the DSCR loan worth it?

    DSCR loan program is an excellent option for real estate investors and those considering investing. Also, a DSCR loan is highly flexible when compared to traditional mortgages.

  2. Are DSCR loans hard to get?

    To qualify for a DSCR loan, you need a debt service coverage ratio (DSCR) of 1 or higher, a credit score of 620 or higher, and a down payment of 20-25% is required. Meeting these requirements may make you eligible for a DSCR loan.

  3. What is the interest rate of a DSCR loan?

    The interest rates for DSCR loans vary depending on the lender and your specific DSCR.
    For the latest DSCR interest rates, click here!

  4. Can I live in a home bought with a DSCR loan?

    The DSCR Loan Program is mainly designed to provide financing to investors for the purchase of real estate properties. It is generally unsuitable for primary residences because these properties often don’t generate enough cash flow to cover monthly loan payments.

  5. Is a 1.5 DSCR good?

    A DSCR of 1.5 indicates that the property’s income is sufficient to pay its monthly debt obligations. This suggests that the borrower has a lower risk of defaulting on the loan and can potentially secure more favorable loan terms and lower interest rates.

  6. Can anyone get a DSCR loan?

    Anyone with a DSCR of 1 or higher, a credit score of 620 or higher, and being able to make a down payment of 20-25% can get a DSCR loan.

  7. Why is DSCR important?

    DSCR is essential because it measures borrowers’ ability to repay their debt using the property’s income.

  8. What are the lender and service fees of DSCR?

    The lender and service fees of a DSCR loan can vary depending on the lender, loan amount, and other factors. Generally, borrowers can expect to pay an origination fee, application fee, appraisal fee, and other closing costs.
    The origination fee can be between 0.5%-1.0% of the loan amount. You should also consider calculating late payment penalties and pre-payment penalties. This fee ranges from $300 to $500.

  9. Do DSCR loans require an appraisal?

    Yes. For DSCR loans, an appraisal is necessary to determine the current value and condition of the property. Lenders use this information to determine loan terms such as loan amount, interest rates, loan-to-value ratio, etc.

  10. Are DSCR loans expensive?

    DSCR loans generally come with higher interest rates. This can make DSCR loans expensive.

Amresh Singh, CEO - HomeAbroad
About the author:

Amresh Singh is the founder & CEO of HomeAbroad and has an extensive 12+ years of experience in the financial services and mortgage industry – building business development and product strategy and leading customer strategy
in the financial services industry domain.

Prior to co-founding HomeAbroad, Amresh has worked for one of
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