Top 5 Questions to Ask a DSCR Lender Before You Apply

Interested in financing your next investment property with a debt service coverage ratio (DSCR) loan?

DSCR loans have become a go-to option for real estate investors looking to expand their portfolios because they focus on the property’s cash flow rather than the borrower’s personal finances.

However, not all DSCR lenders are created equal. Each lender has different requirements, terms, and flexibility.

In this article, we’ll share the top five questions to ask a DSCR lender before you apply so you can find the one that best aligns with your investment needs and goals.

1. What are your DSCR requirements?

“DSCR” is the key metric used to determine a borrower’s eligibility.

It’s calculated using a simple formula:

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

DSCR lenders set their own minimum requirements for loan approval, typically ranging from 0.75 to 1.25 or higher depending on their risk tolerance.

Lenders may adjust their DSCR requirements in response to current market conditions or for specific loan products.

Why it’s important to understand a lender’s DSCR requirements

Understanding a lender’s minimum DSCR requirement helps you:

• Find out if your property meets the approval criteria
• Explore strategies to boost cash flow before applying, such as raising rental rates or reducing your operating expenses
• Avoid potential denials or the need to find alternative lenders

The lender’s DSCR requirement may also influence your loan terms.

For example, properties with higher DSCRs may qualify for more significant loan amounts.

This question sets the stage for a productive discussion with the lender and positions you as a knowledgeable investor.

2. What are your loan-to-value (LTV) ratios?

Loan-to-value (LTV) ratios determine how much a lender is willing to finance for a property compared to its appraised value.

LTV ratio is calculated as:

LTV = (Loan Amount / Property Value) x 100

For example, if a property is valued at $500,000 and the lender approves a loan for $400,000, the LTV ratio is 80%.

The LTV ratio also determines the down payment amount. If the lender covers 80% of the property purchase, the investor must supply the remaining 20%.

Higher-risk properties often come with lower LTVs, requiring larger down payments.

Why it’s important to understand a lender’s LTV requirements

Understanding a lender’s LTV ratio helps with the following:

• An investor’s financial planning, including how much cash they’ll need upfront based on the property’s value and the lender’s LTV
• Risk management—lower LTVs may have higher upfront costs, but they also lower the loan amount
• Determining which properties investors choose to pursue

Asking about the lender’s LTV ratios will help investors better understand their financial needs and plan their investment strategy.

3. What are your interest rates and loan terms?

DSCR interest rates and loan terms can vary significantly from lender to lender.

For example, some lenders only offer fixed rates, while others offer both fixed and adjustable-rate options.

Some DSCR lenders offer shorter term lengths, while others offer up to 30-year terms.

Several factors influence your interest rate options, including:

• Credit score: Lenders may offer borrowers with higher credit scores lower interest rates.
• Property type: Different property types carry varying levels of risk for the lender, which can influence the interest rate.
• DSCR: Properties with higher DSCRs have better cash flow, reducing lenders’ risk.
• LTV ratio: Lower LTV ratios, such as 65% instead of 80%, result in lower loan amounts relative to the property value. This could potentially lead to more favorable rates.
• Market conditions: Inflation, Federal Reserve policies, and other economic factors can influence lenders’ rates.

Why it’s important to understand a lender’s interest rates and loan terms

If investors know the lender’s interest rate and loan term options, they can better determine the overall cost of borrowing.

Park Place Finance offers 30-year fixed loans at competitive rates (from 6.50% APR).

Our purchase LTV is up to 80%, and our cash-out refinance LTV is up to 75%.

4. What documentation will I need to provide?

Because DSCR loans focus on the property’s income potential rather than the borrower’s finances, the required documentation looks a lot different than what’s needed for traditional loans.

Park Place Finance requires the following main items to determine approval:

• Purchase contract (if purchase)
• List of real estate owned
• Property insurance
• Driver’s license
• Last two bank statements
• Subject property lease
• LLC/entity docs (if in LLC)
• Loan payoff (if a refinance)

Why it’s important to understand a lender’s documentation requirements

DSCR lenders understand that real estate investors need financing fast to keep their projects moving.

Here’s why investors need to know what a lender needs before starting the application process:

• Avoid approval delays due to missing or incomplete documentation
• Help investors understand whether they can meet the lender’s standards
• Help the lender process applications more quickly and efficiently

Ask the lender what they need ahead of time, and use their checklist as a guide to make sure you’re fully prepared.

Stay organized, and get an appraisal as soon as possible to confirm the property’s market value and rental income potential.

5. Do you offer flexibility for unique scenarios?

Real estate investments often involve unique circumstances, such as phased construction, pre-leased properties, or plans to refinance down the road.

Ask about the lender’s flexibility to make sure they can meet your short-term and long-term goals, including:

• Prepayment penalties: If you need to pay off the loan earlier than the agreed term, will you face prepayment penalty fees? If so, what are the terms?
• Refinancing options: Do they offer refinancing options with their DSCR loan? And if so, what are the terms, requirements, and/or restrictions?
• Phased construction or pre-leased properties: If you are in the middle of a construction project for a rental property, can they help you secure financing now based on the future income potential?

These are just a small sample of scenarios real estate investors may have.

An experienced, reputable DSCR lender can easily navigate complex scenarios and offer solutions—including alternative options.

The level of flexibility a lender offers can impact nearly every investment stage, from purchase to eventual resale or refinance. Choose wisely!

Park Place Finance: Your trusted DSCR lender

Park Place Finance offers tailored loan solutions for a variety of investment needs.

Leverage our 17+ years of experience for your next investment—whether you are just getting started or have been investing for years.

Start with a simple online submission, or call us at (866) 407-1599 to speak with an account executive.