DSCR Loans: What are they?

A DSCR loan is a real estate loan where the agreed amount is dependent on the amount of money that the property can generate. It stands for “debt service coverage ratio”. This is a popular method of raising funds for an investment purchase. 

Everything You Need to Know about DSCR Loans

• DSCR Loans: What are they and how can I get one?
• How to calculate DSCR

DSCR Loans: What are they and how can I get one?

The biggest difference between a DSCR loan and a regular mortgage is that the lending criteria is determined by the expected cash flow of a property. They’re generally used to fund what’s commonly called a BRRRR property. This stands for:

• Buy
• Rehab
• Rent
• Refinance
• Repeat

The BRRRR process entails finding a distressed property, doing it up, finding a tenant, refinancing against the property, and then purchasing another. Of course, you don’t need to carry out the fifth step if you don’t want to. Many people are happy to stick to one or maybe two investment properties.

A DSCR loan doesn’t require you to divulge your net worth, regular income, tax returns, or other personal information. The whole basis of the loan is calculated on the regular monthly rental you’ll receive once the property has been brought up to standard and a tenant is in situ. DSCR loans can also be termed “non-QM”. This simply means a non-qualified mortgage—in other words, it differs from the lending you’ve probably used to buy the house that you live in.

Until relatively recently, DSCR loans were only available for commercial property. The change in the rules to allow them to also fund residential units has brought a whole new generation of investors into the real estate game.

Getting a DSCR loan is generally pretty easy.

• Find a lender with preferential interest rates and Ts & Cs: These are known as “hard money lenders”. This term means that funds are secured on the property, rather than your net worth. The money is lent from a private company or individual, rather than a bank.
• Find a suitable distressed property: There are many ways to do this. You might register with a realtor who specializes in such real estate. Other methods include purchasing homes that are being foreclosed or even driving around your chosen neighborhood to spot homes that look like they’ve fallen into a state of disrepair.
• Calculate the DSCR: This will be the vital figure that will determine the amount of money you can borrow.
• Make your application and receive your funds: The best hard money lenders will tie up all the necessary admin within 21-35 days.

How to calculate DSCR

Many people stress about how to calculate DSCR. However, it’s really pretty simple.

• Determine the value of the property
• Calculate the monthly income (also known as the property income)
• List all of the property expenses, such as ongoing maintenance costs, tax returns, operating statements, rent rolls… (This list is not exhaustive and must have every reasonable expense included).

The lender will use these figures to determine what’s known as the net operating income (NOI). This is presented in the form of a ratio, where:

DSCR = NOI / Total Debt Payments

If, for example, the NOI is $430,500 and your total debt payment is $320,000, then this would be 430,500 / 320,000 = 1.345. 

Translated into a ratio, this works out as 1:1.35. Any DSCR ratio over 1:1 is likely to be approved. However, for peace of mind and to ensure any unexpected expenses can be covered, the higher the ratio, the better. Aim for 1:2 or higher—this not only shows the lender that you’ve calculated an adequate buffer, but it also means you’ll probably get a better interest rate.

Got More Questions? DSCR Loans: What are they, How They Work and more FAQs at BRRRR Loans

BRRR Loans is a leading hard money lender that specializes in financing investment real estate. Whether it’s your first property or your hundredth, we’ve got the best advice, interest rates, and closing rates to fast-forward your investments.

Get in contact today or visit https://www.brrrr.com to find out more.