Colorado DSCR Loan Requirements

Debt Service Coverage Ratio (DSCR) loans prioritize property income over personal income: they divide the income generated from the investment property by mortgage payments to discern whether the subject property has a favorable cash flow potential about its debt obligations.

Relying on the DSCR ratio calculation means you don't provide details about your personal finances like tax returns or debt-to-income ratio, making it an attractive option for self-employed borrowers whose job history may reduce their chances of securing traditional mortgages. All that matters is the property's ability to cover its operating expenses, which leads to a streamlined loan process.

Credit Score

For Colorado DSCR loans, many lenders will accept a minimum credit score of just 680, but your opportunity to secure lower interest rates rises precipitously should you have a higher credit score, such as 680.

Appraisal and Rent Schedule

To better understand the property's ability to generate income, it must undergo an appraisal to ascertain whether the property value matches the loan amount. If the property has had previous tenants, expect to submit lease agreements and other documents proving its cash flow.

You must also submit a 1007 Rent Schedule to show the expected rental income based on current market values, which may differ from previous lease agreements.

Minimum Property Value and Loan Value

Most lenders, whether banks, private lenders, or credit unions, will only provide DSCR loans for real estate listed at $1.25k or above. The minimum loan value is usually $75k, though some lenders will provide DSCR loans as small as $55k. As Colorado is a pricey place for investment properties - home prices are nearly 51% higher than the average home value - this minimum amount is rarely a concern for investment opportunities.

DSCR of 1.0 or More

When lenders offer DSCR loans, they want to see that the property's rental income exceeds the debt obligations, meaning it needs a higher DSCR than 1.

The minimum DSCR is generally 1.0, but most lenders prefer a higher DSCR of 1.2 or more, which is why you should consider how to boost the property's net operating income through renovations, rent increases, or adding additional amenities like allowing pets.

LTV of 80% or Lower

The loan-to-value ratio identifies how much lenders will allow you to borrow and sets your down payment requirements. Typically, you'll need a loan-to-value ratio of 80% or less, meaning you will need at least a 20% down payment.

20% Down Payment

As a DSCR loan is a higher risk for lenders, these mortgages have stricter down payment requirements than traditional loans. You should expect to provide at least a 20% down payment, with many lenders requesting 25% or more. As with other loans, you'll also need to provide funds for closing costs.

Best Places for Colorado Real Estate Investments

Real estate investors love Colorado for its vibrant culture, boundless space, and excellent growth potential, but a few areas have gained particular attention for investment properties. These are the hottest markets in the state, and you should take a second look at them when determining where to acquire DSCR loans.

📍 Denver

Denver is the financial capital of Colorado, known for being a tech and healthcare hub. At the end of 2022, average rents for residential rental properties were $1,744, up over 9% from 2021. The average commercial property earned a rental income of $37.38 per square foot. 

📍 Grand Junction

Stunning Grand Junction is known for its abundant outdoor activities, making it an excellent place for tourist shops, hotels, and short-term rental properties. Rents are lower here than in Denver, about $1,450, and retail space costs about $14.28 per square foot. This makes it a great place to break into the market and take advantage of low prices, sure that they will rise.

📍 Colorado Springs

Colorado Springs is upscale and rugged, surrounded by gorgeous scenery and plentiful outdoor activities; residents expect attractive but affordable housing and great employment opportunities at small businesses and offices. Accordingly, it is pricier than Grand Junction, with residential rents at $1,576 and commercial rents at $22.50 per square foot.

📍 Fort Collins

Fort Collins is rife with craft beer breweries, signifying its youthful personality and urban feel. Shopping local is important here, which means that small businesses and startups will thrive - and you can provide the property for them to do so. Even pricier than Denver, the average rental income across all residential properties is $2,200.

However, retail and office space is cheaper, averaging $21.90 per square foot; this signifies a need for further business development, making it an attractive option for commercial rental real estate investors.

📍 Boulder

Boulder prides itself on being a cultural capital, and the walkable downtown space is significant to residents here. Helping develop a 15-minute city through apartments is an excellent option for investors, who can expect an average rental income of $3,000 per month.

There's a clear need for affordable housing within the city, especially as Boulder is one of the most expensive places in the United States to purchase a home.

Commercial rents sit at $30.33 on average, less expensive than Denver but quite high compared to other areas in the state.