To understand how a DSCR loan works, you must first know what DSCR means. Lenders use a Debt Service Coverage Ratio (DSCR) to determine a borrower’s ability to repay a loan based on the income they will receive from the investment property they purchase. The calculation is determined by dividing the net operating income by the total debt service.
In other words, the lender will not issue a loan if a borrower doesn’t show sufficient positive income from their property after operating expenses (including the principal and interest payments on a loan).
DSCR loans appeal to real estate investors because they can qualify for the loan based on the cash flow generated by their investment property instead of having to document personal income or provide tax returns. Many lenders require a minimum DSCR of 1.1x and a down payment as low as 20% with the right DSCR and credit score. DSCR lenders also have additional requirements that may include the following:
- Up to 80% max loan-to-value (LTV) ratio
- Eligible property types are 1-4 family and warrantable condos
- There may be a minimum and maximum loan amount
- A pre-payment penalty may apply (NASB does not impose a pre-payment penalty)
- Loan terms can vary from 5 to 30 years
Real estate investors can use a DSCR loan to purchase residential, commercial, or mixed-use properties. If you would like more information on how to purchase real estate investment properties using a DSCR loan*, talk to the experts at NASB at 888-661-1983 or click here.
*Not available in New York, all locations, or all property types. Loans are subject to underwriting, eligibility criteria, and other factors. Your loan officer will provide more information regarding DSCR loans and what may work best for your situation.
