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Investment Loan FAQs

How does a DSCR loan differ from standard investment property loans?

DSCR loans allow flexible financing options for more complex or unique investment scenarios. Often standard loans don’t allow financing for properties with more than four rental units, and they may have restrictions for unique property types. DSCR allows for more unique scenarios as financing is based on rental cash flow, rather than meeting standard requirements.

DSCR lenders also don’t need to limit the total number of rental properties you finance, unlike traditional lenders. DSCR loans can be given to an LLC, rather than an individual, which isn’t possible with standard mortgages.

Do I need good credit to qualify for a DSCR loan?

Although your personal income isn’t considered for financing, you will need to share your credit score to get approved for a DSCR loan.

The minimum requirements vary depending on the situation but a credit score of 640 or higher is often required. This is similar to the requirements needed to qualify for a standard investment property loan.

Why is it called a Debt Service Coverage Ratio loan?

The broad definition of “debt service” is the cash that is required to cover repaying interest and principal for a debt during a set period of time. Borrowers and lenders use the Debt Service Coverage Ratio to measure the ability to repay the annual debt service compared to the net operating income generated by the property.

It’s one measurement that helps determine what maximum loan amount you can get. It can help you and a lender understand whether a property generates enough income to cover the cost of a new loan.

How is the Debt Service Coverage Ratio calculated?

Calculating the Debt Service Coverage Ratio helps to estimate how much an investment property can rent for to help predict the property’s value.

To calculate it, you need to divide the net operating income of the property you want to finance by the total debt service. Net operating income is the revenue minus certain operating expenses. Debt servicing is the cash that is required to cover repaying interest and principal for a debt during a set period of time.

A larger DSCR means there is more income to service the debt, making it more likely you’ll qualify for the financing you want.

What costs are required to close a DSCR loan?

There are closing costs associated with processing any loan, and the costs of a DSCR loan are comparable to standard investment property mortgages. They include costs for the lender to service the loan, as well as an appraisal and other fees.

You’ll also likely need to make a down payment that will be paid at closing. This is typically 20-30% of the loan amount. In some cases gift funds are accepted up to a certain amount to help cover these costs.