When you're trying to get a loan for your real estate investment, there are many things that need to be considered. The debt service coverage ratio (DSCR) is one of those things. You may have heard the term thrown around before and not had any idea what it meant or how it might affect your ability to purchase an investment property. So what exactly is DSCR? And why should you care? Read on to find out!
DSCR stands for Debt Service Coverage Ratio
DSCR stands for Debt Service Coverage Ratio and is used by lenders to determine the amount of cash flow needed to cover the loan payments for a property.
The DSCR formula is calculated by dividing your Net Operating Income (NOI) by your loan payment. NOI is the money you make from operating a property, and it’s usually defined as six net revenue streams: rent, management fees, maintenance fees, other management income such as parking lot spaces or laundry rooms; depreciation (the loss in value over time); and property taxes.
The higher your DSCR score the better chance you have getting approved with a lender who uses this metric when determining whether or not they will lend on one of your properties.
Banks will typically offer about 65% of the DSCR value whereas other lenders might offer up to 90%.
The lender will determine the loan amount based on your financial history and credit score.
In most cases, the DSCR value is calculated based on the rental income that you can collect from your property.
DSCR Loans Pros
"DSCR loans" is the name given to a type of loan that is available for properties with low equity. These loans are also commonly referred to as 80% loan-to-value (LTV) loans, because they allow you to obtain up to 80% of the property value in a single loan. This means you can borrow a much higher percentage than you would be able to if you were using traditional financing, which limits your ability to take out more than 65%–70% of the purchase price in one go.
DSCR loans are ideal for investors who have good credit and want an easy way to purchase properties at bargain prices without having their primary residence tied up while they wait on their investment properties (IPs) to sell or rent, but they have plenty of plusses even if your finances aren't quite up there yet!
DSCR Loans Cons
If you’re not familiar with a DSCR loan, there are some cons that might make it less attractive. Here are a few of the downsides:
Not all states allow them. Only California and Texas have passed legislation that permits these kinds of loans. If your state isn’t one of them, then don’t worry — there are plenty more options!
The interest rates on DSCR loans are higher than other types of loans (most likely because they can be used for just about anything).
This means that when you’re comparing DSCR loans to other types of financing, the interest rates for DSCR might be higher than what you would pay on a traditional mortgage or personal loan. If your credit score is good but not great, this could make it more difficult to qualify for a DSCR loan.
There are many types of loans available, but the DSCR loan could be best for you.
There are many types of loans available, but the dscr loan could be best for you. This type of loan is great for the purchase income producing real estate properties. This can include apartment buildings or office buildings that generate revenue from tenants on a monthly basis. With these types of properties, it's easy to see how the borrower could easily make their payments with such steady streams of revenue coming in each month.
The DSCR loan has specific requirements set by lenders as well as borrowers. Both parties must meet certain criteria before they can apply for this type of mortgage.
This is typically, lenders require prospective borrowers to have enough capital in order to cover any unexpected expenses that may arise during construction and/or pre-opening phases (such as legal fees).
Also, borrowers must be able to show proof of funds for at least 20% of the purchase price. The borrower must also have a decent credit score, which can range from 600-740 (above 720 is even better). With these requirements in place, it's easy to see why this type of loan is so popular with real estate investors looking to purchase income generating properties.
The DSCR Loan is a good option for borrowers that want to get a loan with a low interest rate, but it’s important to understand how this type of loan works before you apply. You should also consider whether or not your property qualifies for this type of financing so that you can get approved today. We have a excellent DSCR loan here available for real estate investors! Give us a call or set up an appointment to speak with a loan specialist to get your deal funded! #DSCR #dscrloans #dscr