The Rise of the DSCR Loan

Amidst the chaos and unpredictability of the housing market in recent years – frenetic demand, skyrocketing appreciation, surging inflation, interest rate hikes, and ongoing uncertainty – it has been hard for real estate investors to find good deals. 

The standoff between sellers seeking prices of the past and buyers faced with much higher interest rates has created a bottleneck. Sellers are reluctant to give up their favorable rates and inventory has remained low. Meanwhile rents have risen but not enough to boost cap rates above current interest rates. But good investors, like entrepreneurs, continue to look for opportunity in the haystack.

Enter the DSCR Loan – or “Debt Service Coverage Ratio” Loan – which has emerged this year as a popular choice for investors in these challenging times. DSCR loans do not require personal income to qualify. Instead the underwriter uses the property’s rental income to qualify, so long as it meets or exceeds the monthly payment, calculated as principal, interest, taxes, insurance and HOA fee. Some lenders will even loan with rental income as low as 75% of the monthly cost.

DSCR rates are typically higher than conventional financing – an understandable premium for the convenience of sidestepping tedious underwriting. But the benefit to some investors can outweigh the added cost, particularly to those with DTI ratio challenges, inadmissible vacation rental income, erratic tax return history or self-employed status. There are also ARM options that can be lower than the 30-year fixed rates. 

There are plenty of conditions that still need to be met in order to qualify for the best rate – each lender has different requirements and levers that can be adjusted to find the right match. But a general rule of thumb seems to be that if your target property cash flows, it will likely qualify for a DSCR loan. 

You can read more about DCSR loans here.