DSCR Loan Resource Center
DSCR loans allow real estate investors like you to qualify for a loan based on the income your property generates—instead of your personal finances. Learn how you can avoid traditional mortgage loan requirements and secure the funding you need with Visio.
What is a Debt Service Coverage Ratio (DSCR) Loan?
Debt Service Coverage Ratio (DSCR) loans were created to help investors secure loans without the strict requirements of traditional mortgages. Unlike other loan types that evaluate your personal income, DSCR loans evaluate the current or projected income of your investment property to determine whether you qualify. This, and other advantages, make DSCR loans an incredible solution for investors.
DSCR vs. Other Loan Types
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Why should I use a DSCR loan?
The top 3 use cases we see for DSCR loans are:
1. Purchasing a long-term rental (e.g., a house leased for a year) or a short-term rental (e.g., a vacation property).
2. Taking money out of one rental property to buy another investment property.
3. Taking money out your property to improve it or improve a different property.
4. Convert a short-term construction loan into a long-term DSCR loan after your rental property is built.
Real estate investors like DSCR loans because they can qualify for them based on their property’s income potential rather than having lenders evaluate their personal income or financial history. But that's not the only benefit to DSCR loans. We've listed a few more below.
- Simpler loan documentation,
- The ability to borrow through an LLC
- Financing for a greater variety of property types
- Financing for a greater number of properties
- Fast closing times
If you've got an underperforming property with potential, a DSCR loan can help you capitalize on the opportunity quickly and efficiently.
What are typical DSCR loan property types?
DSCR loans typically can be used for the following property types:
- Single-family (1-4 unit) residential rentals- Vacation or short-term rentals
How Do DSCR Loans Work?
The DSCR is a tool to help lenders understand a borrower's ability to pay back a loan based on the monthly rental income of the property. It's a simplified way to measure cash flow. To calculate the DSCR, you simply divide the monthly rent by the monthly principal, interest payments, taxes, insurance, and association dues (PITIA).
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What is a strong DSCR?
The math is pretty simple. A DSCR of 1 indicates that the property's income exactly equals its expenses. That means you're breaking even. If the DSCR is below 1, the investor would need to subsidize the rest of the money with income from other sources.
A debt service coverage ratio of 1.2 is considered solid. Anything above 1.5 is strong. Let's look at some examples for a clearer picture.
DSCR > 1
Rent (income) = $2,350
➗
Principal + Interest = $1,600
Taxes = $250
Insurance = $150
Association Dues = $35
PITIA (expenses) = $2,035
DSCR = 1.15 (positive cash flow)
DSCR < 1
Rent (income) = $2100
➗
Principal + Interest = $1,800
Taxes = $250
Insurance = $150
Association Dues = $35
PITIA (expenses) = $2235
DSCR = 0.94 (negative cash flow)
What additional expenses are missing from DSCR?
There are more expenses (DS) that need to be taken into consideration for the full picture of cash flow for any given property.
Our goal in highlighting these prevalent real estate investor costs is to show that a fantastic DSCR ratio does not mean automatic success. It's important to consider all your debt obligations before obtaining a DSCR loan.
Property Management Expenses
With a portfolio of investment properties naturally comes general maintenance and repairs. This is not necessarily a monthly expense, however it is still important and can reflect your total debt service for the year. We recommend having savings set aside specifically for this purpose.
Vacancy Rates
"Vacancy" might as well be a curse word for a real estate investor. A vacancy means no rental income to assist with your mortgage payment. Again, we recommend every real estate investor have substantial savings to help them build their real estate portfolio. It's also good practice to have Rent Loss Insurance to assist with rental income in the event of a vacancy.
Tenant Costs
The list of expenses for real estate investors goes on and on. Investment properties need tenants, which means marketing, advertising, screening, and contracting. These are not recurring expenses, yet still they can add up and impact your net operating income annually.
Income Taxes
A great thing about DSCR loans is that they don't look at your personal debt or income. However, on your annual tax returns you are going to have to include rental income. Fortunately, there are great tax deductions for landlords.
Furniture
If you are using a DSCR product to purchase a vacation rental, the DSCR calculation does not take into consideration all of the furniture you have to buy for the property. Not to mention the dishes, bedding, electronics, etc. needed to get a vacation rental property up and running.
How Do I Apply for a DSCR loan?
Visio leverages more than a decade of experience to provide you with the simplest loan application process possible, supporting you every step of the way. Here's an overview of what you can expect.
Start your application
Visio collects necessary documentation, perform a background check, and order your appraisal.
- Application- Credit
- Appraisal
- Borrower’s Authorization
- Primary ID
- Purchase Contract
Complete Loan File
Visio works with the borrower and other third-parties to compile a complete loan file to verify eligibility and terms.
- Background check- Title & Property tax certificate
- Insurance (Flood and unnamed perils)
- Entity documents
- Payoffs
- Reserves
Approve and Close Loan
Visio approves your loan and coordinates closing and funding with an approved title company.
- Signing and Funding Process- Signature Requirements
Payment
Borrower submits their monthly loan and escrow payments to a loan servicer for payment collection and accounting.
What are DSCR loan requirements?
If you are an investor and looking to obtain a DSCR mortgage, make sure you meet these basic requirements:
Minimum Credit Score: Most DSCR lenders require a 680 credit score with better rates for higher credit. Most lenders also have minimum tradeline requirements, including both amount and duration. Lenders also will consider whether you have any other significant credit events on your credit report, such as foreclosures, bankruptcies, or past-due payments.
Minimum Down Payment or Equity: Maximum loan-to-value on purchase loans typically is 70–80%. On refinances, it's 70–80%, depending on property type, credit, and DSCR.
Minimum Property Value: Most lenders have a minimum property value of $150k.
Minimum Loan Amount: A good minimum standard is $75k.
Why is my DSCR low?
There are a few factors that could lower your DSCR ratio. DSCR lenders usually require a DSCR of 1.2 or more. You may qualify initially for a DSCR mortgage, and then have some numbers come back higher or lower than you were expecting. Knowing about these DSCR surprises upfront can help investors be extra cautious when calculating DSCR to guarantee positive cash flow.
Higher than Expected Insurance
If the cost of insurance you calculated in your initial debt-service coverage ratio comes back higher, your monthly expenses will increase and therefore lower your DSCR ratio, cash flow, and ability to qualify for a loan.
Higher than Expected Taxes
Similar to an increase in insurance, an increase in property taxes will increase your monthly expenses and, therefore, your debt-service coverage ratio.
Lower than Expected Rental Income
Frequently, we see a property being leased for a rent that is higher than market value. When an investor lowers their rent and rental income, the debt-service coverage ratio goes down.
Prepayment Penalties
While this is not a surprise that will impact your ability to qualify for a DSCR mortgage, a prepayment penalty is a feature of most DSCR loans that you don't want to be a surprise. A prepayment penalty is a contractual clause that states the borrower is going to pay the lender an additional fee if the borrower pays the loan off early. This isn’t necessarily a “penalty,” however. Here's how it works.
A common prepayment penalty structure — and in fact, Visio’s standard structure — is called a 5/4/3/2/1 structure. This means that if the borrower pays off the loan in year one, they have a 5% prepayment penalty, in year two, a 4% prepayment penalty, and so forth. If your prepayment penalty structure is a 3/0/0, it means that in the first year you pay a 3% fee, and then the penalty goes away after that. The term "Penalty" is somewhat misleading because it does not necessarily impact your DSCR loan. For instance, investors looking to hold onto their properties long-term are not impacted by the prepayment penalty. Investors who want more flexibility can take a higher interest rate to get rid of their prepayment penalty entirely.
How can I improve my DSCR?
Simply put, the debt service coverage ratio is a ratio, and it can be manipulated by changing the numbers. Here are ways to improve your DSCR:
Charge More Rent
One surefire way to improve your DSCR, is to charge more rent for your rental property. An increase in rental income will give you more cash flow to pay your monthly mortgage payments, and therefore improve DSCR.
Lower Your Interest Rate
Lowering your interest rate will lower your monthly mortgage payments and therefore your DSCR. The best ways to guarantee a lower interest rate are to increase your down payment and improve your credit score.
Negotiate Your Taxes and Insurance
Other key debt obligations in the DSCR formula are taxes and insurance. Be sure to shop insurance providers for the best rates, though never compromise on coverage. You should also fight your property taxes annually to continue to lower your total debt service.
Why VISIO?
Founded in 2012 and headquartered in Austin, TX, Visio Lending is the nation's leader in rental loans. We help investors grow their rental portfolios with our streamlined processes, innovative technology, and outstanding team. Our DSCR service is known for its low documentation, full 30-year terms (no balloons), identity protection (through corporate financing), and common-sense underwriting for short term rents.
15+ Years of experience
A+ BBB Ratings
Nationwide DSCR Loans
14,000+ closed loans
What should I look for in a DSCR lender?
When comparing DSCR loan lenders, here are some questions to ask yourself.
What are the lenders rate and fees?
It's important to know exactly what your costs will be for the loan. The last thing you want is to end up at the closing table with unexpected costs. Most lenders charge an origination fee and one or more administrative fee (underwriting fee, documentation fee). Also be on the lookout for a prepayment penalty if you are looking to sell the property in the near future.
What are the lender’s eligible property types?
This may seem obvious, but it does vary between lenders. For instance, some lenders have DSCR Loan Programs for vacation rentals and others do not. Other common variations include warrantable vs. non-warrantable condos and multi-family vs. single-family homes.
Is the lender focused on and experienced in working with investors?
In our opinion, this is the most important consideration. Lenders who work with investors often understand the nuances associated with financing and have programs tailored to help investor needs. There are a lot of new DSCR lenders on the market. Here are some things you can look for to help hone in on the most experienced lenders:
- Ask about the number of DSCR loans they have closed.
- Ask how long they’ve been offering and closing DSCR loans.
- Ask whether they have a dedicated team of operations personnel that process and underwrite their DSCR loans.
- Ask about their property insurance requirements, because they typically are materially different for investment properties as compared to owner-occupied properties.
- Ask about their prepayment penalty or rate buy-down options. DSCR loans almost always have a prepayment penalty.
- Ask about the ability to finance in an LLC or corporate entity.
What our customers say
My AE Matthew M. Priester attended and helped us in all process to turn in a smooth transaction. Visio has organized fast process. I used only DSCR program and its very competitive with the market. Very recommended.
Thank you and your Visio team for your excellent work and help in making my transaction a success. It was a pleasure to work with you and I look forward to much more business with you all in 2024.
Visio Lending has been incredibly easy to work for the property refinance process. They were responsive, provided excellent service and had very competitive rates. I look forward to working with them on many properties to come.