DSCR Loan Requirements: What Lenders Look for in Quality DSCR Loans
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November 30, 2023

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Debt service coverage ratio loans, known as DSCR loans, can be used to purchase or refinance a rental property without the need for a borrower’s tax returns or personal income.

The flexible DSCR loan requirements allow investors to qualify based on the property’s cash flow, rather than documents that don’t accurately reflect your income.

Let’s discuss what investors need to know to qualify for a DSCR loan, including how DSCR is calculated, what are the DSCR loan requirements, and what lenders look for in a borrower.

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What is a debt service coverage ratio (DSCR)?

The debt service coverage ratio is a simple financial metric that lenders use to evaluate a borrower’s ability to meet their debt obligations.

Lenders generally have a minimum DSCR requirement to qualify for a loan.

A higher DSCR is better because it suggests a wider margin of safety for the lender, and shows that there is more income available to cover your debt payments.

DSCR is essentially your total payment divided by your total rent.

If the number is greater than 1.0, your rents are higher than your total payment. If it’s less than 1.0, the expenses exceed the rental revenue and the property has a negative cash flow.

How is DSCR calculated?

DSCR is calculated using the following formula:

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

A property’s NOI includes the income generated by the property before deducting interest, taxes, and other non-operating expenses.

To calculate NOI, subtract your operating expenses from your total revenue.

The borrower’s total debt service includes:

To calculate your total debt service, add up your principal, interest, taxes, insurance, and HOA fees.

Then, you can accurately calculate your DSCR.

What does my DSCR need to be to qualify for a loan?

Ideally, your DSCR will be above 1.0, meaning your property generates enough income to cover its debt obligations.

For example, a DSCR of 1.25 is a healthy figure that indicates that the property brings in 25% more per month than the PITI payment.

A higher DSCR not only increases the likelihood of loan approval but also may result in more favorable loan terms, such as lower interest rates.

Some lenders, including Park Place Finance, allow a DSCR as low as 0.75, but investors should strive for the highest figure possible for their property.

What are the DSCR loan requirements?

While DSCR is the most important requirement for a DSCR loan, investors also must meet other lender requirements.

Each lender will have slightly different requirements, but here is what you can expect from Park Place Finance:

  • Property types: Investment properties only — single-family homes, duplexes, triplexes, quadplexes, warrantable condos, urban and suburban properties
  • Loan amounts: $100,000 to $2,500,000
  • Minimum credit score: 660
  • Minimum DSCR: 0.75
  • Payment options: Fully amortized, interest-only
  • Purchase loan-to-value (LTV): Up to 80%
  • Cash-out refinance LTV: Up to 75%
  • Eligible locations: 42 states
  • Eligible rental income types: Long-term or short-term rentals, vacant, Airbnb

Our DSCR loans come with 30-year, fixed-rate terms at competitive rates that are near conventional rates. Additionally, our loans only report to credit when in default, so you can avoid adding debt to your credit report.

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What do lenders look for in a quality DSCR loan?

The most important factors for a DSCR loan are the DSCR, the LTV, and your credit score.

LTV refers to the loan amount as it relates to the actual value of the property.

Typically, DSCR loans do not exceed 80% LTV, which means the borrower needs to bring 20% as a down payment for the loan plus closing costs.

Beyond these key factors, here are some general aspects lenders look for in a quality DSCR loan:

  • Stable DSCR over time
  • Consistent cash flow
  • Property appraisal
  • Strong financial statements
  • Good credit score
  • Complete documentation
  • Clear strategy for potential risks

While DSCR lenders do not require tax returns or income verification, they still need to see the following:

  • List of real estate owned
  • Previous two bank statements
  • Purchase contract (if applicable)
  • Property insurance
  • Subject property lease
  • LLC/entity docs (if applicable)
  • Loan payoff (if refinance)

Hard money lenders like Park Place Finance encourage transparency and open communication throughout the loan process.

We provide a dedicated Account Executive for each borrower to ensure you know what’s needed to get your deal approved and funded as quickly as possible.

What do I do if my DSCR is not high enough to qualify?

If your DSCR is not high enough to qualify for a loan, there are several steps you can take to improve your financial situation and your chances of approval.

Strategies to consider include:

  • Raise the rent
  • Boost occupancy rates
  • Reduce operating expenses
  • Increase your down payment
  • Work to improve the value of your property
  • Improve your credit score

Work with your lender to understand the reasons that you’re unable to qualify and what they suggest for improving your chances in the future.

Park Place Finance can also work with you to find an alternative loan solution while you wait to improve your DSCR scenario.

For example, investors may choose to apply for a bridge loan or even a fix-and-flip loan if they need to make improvements to their property.

Apply for a DSCR loan with Park Place Finance

Park Place Finance is your trusted hard money lender.

We have over $1 billion in loans funded nationwide from 17 years in business.

We pride ourselves on our personalized and efficient lending experience. When you choose to work with us, you can rest assured that a team of real people will be dedicated to funding your deal as quickly as possible.

Ready to get started? Share some basic details about the financing you’re looking for and we’ll reach out to discuss your loan options.

Or, you can call us at (866) 407-1599 to speak with an Account Executive now.

We look forward to partnering with you for many real estate deals to come!

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