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DSCR stands for Debt Service Coverage Ratio. This is a tool that helps a borrower's ability to repay a loan by evaluating the property's monthly rental income.

DSCR is a straightforward method of measuring cash flow, determined by dividing the monthly rent by the total monthly costs, which include the principal, interest, taxes, and insurance (together known as PITIA).

For commercial and mixed use property, DSCR is calculated by dividing the annual Net Operating Income (NOI) by the annual debt service (PITI). The difference with this approach is you are including the other operating expenses like utilities, maintenance, management fees, janitorial services, etc.

To calculate the DSCR, divide the subject property's rental income by the monthly PITI (principal, interest, taxes, and insurance).

Keep in mind that for commercial and mixed use properties they use Net Operating Income divided by PITI.

Minimum Down Payment
DSCR loans, also known as investment property loans, Non-QM loans, or rental loans, have become very popular lately. But why all the buzz? While investors can still get traditional loans or funds from small banks, these options are difficult to qualify for and require significant cash reserves. DSCR loans are made for real estate investors and use the rental income from the property to help qualify for the loan. Let's break it down.

Based on the Property's Rental Income, Not Your Income
Experienced real estate investors or self-employed people without W-2s often have trouble meeting the strict requirements of conventional loans. These loans require good credit, high reserves, and proof of income. They are also underwritten using a Debt-to-Income (DTI) ratio, which compares your personal debt to your personal income. If you're trying to get a loan for a rental property, the payment for that loan is included in your DTI calculation. You might be able to offset this new payment with rental income, but it depends on how well you can prove the expected rent. Investors with extra income from other sources might cover the gap in their DTI, but self-employed investors or those with multiple mortgaged properties might not have the extra income to make up for it. DSCR loans don't use DTI at all. Instead, they look at the property's rental income compared to the loan payments, making it easier for investors to qualify.

Borrow Through an LLC or Entity
Many investors prefer to borrow through an LLC or corporation to keep their personal information private and protect their other assets. This helps shield their personal assets in case something goes wrong with the property. Conventional loans can only be taken out in an individual's name, but DSCR loans allow you to borrow through an LLC or other business entity.

DSCR Lenders Are More Flexible on Property Limits
With conventional loans, even if an investor can afford to take on several mortgages, they can only get loans for up to ten properties. Most DSCR lenders don't have a set limit, instead looking at the total amount of credit the investor is exposed to and using common-sense guidelines.

Require Less Documentation
Conventional mortgage loans usually require a lot of paperwork, including pay stubs, bank statements, and tax returns. Underwriters thoroughly review your financial history, which can take time. Missing documents can cause delays. DSCR loans, however, focus more on the property's value and rental income, as well as your credit. As a result, there is less paperwork needed. Most DSCR lenders won't ask for proof of income, employment, or assets (except for liquid reserves).

While it is best to discuss your specific scenario with one of our Loan Agents, here are some general requirements:

Minimum Credit Score
We don't have a minimum credit score, even though most DSCR lenders only go as low as 660 or 680. Most lenders also have a minimum tradeline requirement (amount and duration) reporting on your credit report, and also will consider if you have significant credit events, such as bankruptcies, foreclosures, and recent mortgage lates. Some lenders also require charge offs and collections be paid off prior to closing, although we do not require this.

If you don't meet the credit requirements for a DSCR loan, you may be a better fit for our Hard Money loan option.

Minimum Down Payment or Equity
We can go as high as 85% LTV on purchase loans, and 80% LTV on refinance, depending on the property type, credit and DSCR ratio.

Minimum Property Value
We have a minimum property value of $100k. If you own multiple investment properties worth over $50k, ask us about our blanket loan option.

Minimum Loan Amount
Most lenders have a minimum loan amount of $100k. We can go as low as $75k.

When comparing DSCR loan lenders, it's important to consider the following:

What are the lender's rates and fees?
It's essential to understand the full cost of the loan upfront. You don't want to be caught by surprise with unexpected expenses at closing. Most lenders charge an origination fee, along with other administrative fees like underwriting and documentation fees. Additionally, be aware of any prepayment penalties, especially if you plan to sell the property soon after purchasing it. Most importantly, make sure you are dealing with a reputable lender.

Is the lender experienced in working with investors?
In our opinion, this is the most important factor to consider. Lenders who specialize in working with investors tend to have a better understanding of the unique needs and challenges of investment financing. As the market for DSCR loans grows, it's helpful to look for lenders with experience. Here are some questions to ask potential lenders:

– How many DSCR loans have they closed?
– How long have they been offering DSCR loans?
– Do they have a dedicated team that processes and underwrites DSCR loans?
– What are their property insurance requirements (they may differ for investment properties versus owner-occupied properties)?
– Do they have prepayment penalties or rate buy-down options? Keep in mind that most DSCR loans include a prepayment penalty.
– Do they allow financing through an LLC or corporate entity?

Choosing a lender who has a solid track record and a specialized focus on real estate investors can make a big difference in the loan process.

While this may seem straightforward, it can vary between lenders. Some lenders offer DSCR loan programs for vacation rentals, while others do not. Other variations include whether the lender finances warrantable versus non-warrantable condos, or multi-family homes versus single-family properties. Be sure to confirm that your specific property type is eligible for financing with the lender you choose.

At Trulo Mortgage, all property types are considered, including 1-4 residential, 5+ multifamily, commercial, and mixed use. The only property types we try and stay away from is special use commercial property. This is going to be commercial property that serves a special narrow purpose or can only be used by a specific type of business, such as gas stations and churches.

Yes! We can do DSCR loans for rural properties. There may be certain acreage limits, and the property can't be used for agricultural business purposes.

It is also important to consider that depending on how rural the property is, finding an appraiser or nearby comps may create a separate issue.

We have options from no prepayment penalty to 5 years. The longer the prepayment penalty, generally, the lower the rate and cost will be. The pre-payment penalty may vary based on the loan, so it's important to get those exact details from your loan agent.

A rate buydown in a mortgage allows a borrower to lower their interest rate by paying additional upfront costs, known as discount points, at closing. This can reduce monthly mortgage payments for a certain period or the entire loan term, depending on the type of buydown. Our suggestion is to speak with a Loan Agent directly about your scenario to see if a rate buydown makes sense, and which option makes the most sense, as it varies by each borrower's individual situation.

Types of Rate Buydowns:

1. Permanent Buydown: The borrower pays discount points to secure a lower interest rate for the life of the loan. Typically, each discount point (1% of the loan amount) reduces the rate by around 0.25%, but this varies by lender. Example: On a $300,000 loan, paying $6,000 (2 points) might reduce the rate from 7% to 6.5%.

2. Temporary Buydown (e.g., 2-1 or 3-2-1 Buydown): The borrower (or sometimes the seller or lender) pays a lump sum to temporarily reduce the interest rate for the first few years. Common structures:
– 2-1 Buydown: Rate is 2% lower in year 1, 1% lower in year 2, and reverts to the original rate in year 3.
– 3-2-1 Buydown: Rate is 3% lower in year 1, 2% in year 2, 1% in year 3, then reverts.
Often used by sellers to attract buyers or lenders to help affordability.

Pros and Cons of a Rate Buydown

✅ Pros:
– Lower initial mortgage payments
– Can make homeownership more affordable early on
– Can be beneficial if planning to refinance before the full rate applies (in temporary buydowns)
– Helps buyers qualify for a loan with a lower debt-to-income (DTI) ratio

❌ Cons:
– Requires higher upfront cash
– If selling or refinancing early, upfront costs may not be recouped
– Can be complex, especially temporary buydowns

Good news! Your property is still eligible if it is vacant, as long as it is still in a livable condition. This applies to purchases, refis, and cash outs. Most lenders require the property to be tenant occupied for a refinance. We do not! Reach out to your Loan Agent to see if there will be any additional requirements or limitations based on your scenario.

How is the DSCR calculated on a vacant property?
We use a specific type of form ordered with our appraisal reports where the appraiser will also provide a report with a projection of the monthly rental income, based on comparable rental properties in your area.

Yes! We allow short term rental income for our DSCR loans. Reach out to your Loan Agent for more details.

That's ok, we work with all DSCR ratios, it just impacts your rate. Reach out to your Loan Agent for more details.