The Top DSCR Loan Benefits Every Investor Should Know

When you’ve maxed out your traditional financing options, DSCR loans are one of the best ways to fund a real estate investment. They’re approved based on the property’s projected income, not your personal income, allowing you to close more deals and scale your portfolio.

Case in point: Asset Based Lending’s DSCR loan program has funded countless rental properties nationwide for investors who couldn’t find funding elsewhere. In this article, we’ll explain what makes these loans unique and why you might consider applying for one. 

What Is a DSCR Loan?

A DSCR loan is a mortgage that is approved based on the debt service coverage ratio (DSCR) of the property you want to finance. Other factors like your credit history and experience often still play a role, but the property’s DSCR is the most important qualification factor.

So what is DSCR exactly? It’s the property’s ability to cover the mortgage payment with its net operating income (NOI). For example, if a property generates $1,500 in monthly NOI and the monthly loan payment is $1,000, the property essentially pays for itself. 

Lenders measure DSCR by dividing the property’s NOI by its total debt service:

DSCR = Net Operating Income (NOI) / Total Debt Service

In our example, this would be $1,500 divided by $1,500, which equals 1.5. Any DSCR at or above 1.0 means the property can cover its debt payments on its own. Anything under 1.0 means the property can’t support its debt payments. In short, the higher your DSCR, the better. Understanding how DSCR is calculated is the foundation for appreciating the full range of DSCR loan benefits available to real estate investors. 

Top Benefits of DSCR Loans

When you get a DSCR loan from a lender like ABL, you can look forward to:

No Personal Income Verification

DSCR lenders focus on the income potential of the property. Consequently, they don’t need to verify your personal income by collecting tax returns, W-2s, or pay stubs. This is ideal for those with irregular income or who’ve already maxed out their debt-to-income (DTI) ratio.

No Debt-to-Income (DTI) Ceilings

Your debt-to-income (DTI) ratio compares your gross monthly income to your total monthly debt by dividing the latter by the former:

DTI = Total Monthly Debt / Gross Monthly Income

Traditional lenders use your DTI as a gauge of your financial health and usually set a maximum DTI they’re willing to lend against, such as 36%. 

By contrast, DSCR loans don’t have a DTI ceiling, so you can theoretically borrow an infinite amount as long as the underlying properties’ income supports the debt. 

Faster Closings

With no personal income verification, no DTI ceiling, and less red tape overall, DSCR loans close much faster than traditional mortgages. For example, DSCR loans from Asset Based Lending often close within 30 days.

Faster Portfolio Growth

With no DTI limits, DSCR financing makes it easier to scale your real estate portfolio. Instead of buying a primary residence and maybe one or two investment properties, you can buy limitless rental homes, so long as the NOI supports the loan.

How Does a DSCR Loan Work?

Now that you know the benefits of getting a DSCR loan, here’s how getting one works:

Property Selection

First, identify an existing rental property to acquire or a property you intend to turn into a rental. Ensure the estimated cash flow, or NOI, is strong enough to warrant a DSCR loan. You can do this by comparing the property’s historical rent and operating expenses or its projected rent and operating expenses via comparable properties nearby (aka “comps”) and your experience.

Loan Application

Next, research DSCR lenders in your area and apply for a loan. You’ll need to supply them with some basic information about you and your project, such as the property address, existing lease agreements, and projected income statements. You may also need to share your credit history. However, you won’t need to verify your personal income with tax returns or W-2s.

Underwriting

Once the DSCR lender has all your information, they’ll analyze the deal to determine whether it meets their lending criteria. Most importantly, they’ll verify that the property’s NOI is enough to cover the projected monthly debt payments. Many DSCR lenders set a minimum DSCR requirement, such as 1.25. ABL offers loans with DSCRs as low as 1.0.

Closing and Funding

If and when the loan is approved, the lender will set a closing date with you. That’s when you’ll meet the seller and lender to finalize the purchase. The loan funds are generally transferred from the lender to an escrow agent or title company, which then transfers the funds to the seller. At that point, you’ll start making regular loan payments to the seller. 

5 Tips to Qualify for a DSCR Loan

To take full advantage of DSCR loan benefits, you’ll want to position yourself as a strong applicant from the start. 

Calculate the DSCR Before Applying

Run the numbers yourself first. If the property’s projected NOI won’t cover debt payments, then it may not be worth applying for a loan. 

Set Conservative NOI Projections

When estimating NOI, be conservative. It’s better to end up with a higher NOI than expected than to have the property underperform and not be able to service its debt.

Make a Solid Down Payment

The more equity you have in a deal, the lower the lender’s risk since you’re less likely to default and walk away. At Asset Based Lending, we require a minimum down payment of 20%. 

Maintain a Decent Credit Score

While DSCR loans are more forgiving than conventional mortgages, most lenders still have a minimum credit score requirement. For example, Asset Based Lending requires a credit score of at least 660.

Work with a Reputable DSCR Lender

Not all DSCR lenders are equal. Choose a reputable lender like ABL who knows what documents matter and how to structure deals that benefit you and the lender.

Pre-Qualify for a DSCR Loan from ABL

Whether you’re a seasoned investor looking to scale your portfolio or someone who’s been turned down by traditional lenders, a DSCR loan could be the answer 

Asset Based Lending specializes in funding deals that other lenders won’t. Our streamlined underwriting process means you can move from application to closing faster. Pre-qualify now to see how much you could borrow.