DSCR Loan Terms: How Interest Rates and Amortization Periods Impact Your Borrowing Power

One of the most popular financing tools for real estate investors is the debt service coverage ratio (DSCR) loan, which uses DSCR to determine a borrower’s ability to repay the loan.

DSCR loans offer real estate investors greater flexibility than traditional loans because approval is largely based on the property’s income potential rather than the investor’s personal finances.

However, two major factors influence DSCR: interest rates and amortization periods. In this article, we’ll break down the relationship between interest rates, amortization periods, and DSCR and discuss strategies for balancing these variables.

What is DSCR, and how is it calculated?

DSCR compares a property’s income potential to its debt obligations.

It’s calculated using the following formula:

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

NOI is the property’s income after operating expenses but before debt payments.

Total debt service is the total of all loan payments (principal and interest) for a given period.

DSCR example

For example, if a property generates $100,000 in NOI per year and has $64,000 in annual loan payments, the DSCR is:

DSCR = 100,000 / 64,000 = 1.56

A DSCR of 1.56 means the property generates 56% more income than required to cover its debt payments.

Why do lenders use DSCR to evaluate risk?

Real estate investors have vastly different property financing needs than traditional homebuyers.

Traditional loan structures don’t take into account these unique needs.

Hard money lenders recognize this gap in the market and use DSCR loans as a tailored, straightforward way to determine whether a property can generate enough income to cover its debts.

Lenders gain a more relevant measure of repayment ability by focusing on the property’s income rather than the investor’s personal finances—especially for investors with fluctuating rental income or multiple properties.

How does DSCR impact an investor’s loan approval and terms?

Lenders use minimum DSCR thresholds to determine loan eligibility. Some lenders accept a DSCR as low as 0.75, while others require at least 1.2 or higher.

A DSCR below 1.0 indicates that a property isn’t generating enough income to cover its debt payments. Lenders can adjust other term requirements to balance risk.

DSCR can influence the following loan terms:

• Interest rates: Higher DSCRs may qualify for lower interest rates, while lower DSCRs can result in higher rates to offset lender risk
• Loan amount: Lenders may offer larger loan amounts for higher-DSCR properties
• Down payment: Lower DSCRs may require higher down payment amounts
• Loan flexibility: Higher DSCRs can make it easier to negotiate more favorable loan structures, including amortization adjustments or interest-only options

DSCR is one of the most important factors in securing financing for real estate investments, but interest rates and amortization periods also influence your DSCR and loan eligibility.

Let’s take a closer look at how these factors are related.

How do interest rates impact your DSCR?

Interest rates directly impact a loan’s monthly debt payments and, as a result, affect the “total debt service” portion of the DSCR calculation.

For example, consider a borrower with an $800,000 loan on a 30-year fixed amortization schedule:

• At a 7% interest rate, the monthly mortgage payment is $5,322.42
• At a 9% interest rate, the monthly payment is $6,436.98

Interest rates and DSCR have an inverse relationship:

• When interest rates rise, monthly debt payments increase, reducing DSCR
• When interest rates fall, monthly debt payments decrease, improving DSCR

Because lenders have a minimum DSCR threshold for approval, rising interest rates can push DSCR below the required level.

Example: How interest rates influence DSCR and eligibility

Let’s look back at the example of the property with a DSCR of 1.56:

DSCR = 100,000 / 64,000 = 1.56

If interest rates were a couple of percentage points higher and increased the borrower’s annual debt service to $85,000, the new DSCR would be:

DSCR = 100,000 / 85,000 = 1.17

Investors should closely monitor interest rates and work with their lenders to structure loans that optimize DSCR.

How does amortization affect your DSCR?

The amortization period is the time it takes to repay your loan.

Similarly to interest rates, amortization also influences the “total debt service” portion of the DSCR formula.

• Longer amortization periods result in lower monthly payments and higher DSCR
• Shorter amortization periods result in higher monthly payments and lower DSCR

A 30-year amortization period is the most popular choice for many investors because it keeps monthly payments low and improves the DSCR.

Example: How amortization influences DSCR and eligibility

Using the same example property that generates $100,000 annually with a $800,000 loan and 7% interest rate, let’s look at how different amortization periods affect DSCR:

Depending on the lender’s requirements, a shorter amortization period could impact your loan eligibility.

Park Place Finance’s elite DSCR loan product offers 30-year fixed rates and DSCR coverage as low as 0.75 for maximum flexibility and affordability.

How to balance interest rates and amortization for your optimal DSCR

Investors seeking DSCR financing must maintain a strong DSCR for approval.

Fortunately, there are several strategies to help you balance all influencing factors and achieve the DSCR you need:

• Increase your NOI: Raising your NOI directly improves the ratio. Investors can boost NOI by either raising rental rates, reducing vacancy rates, lowering operating expenses, or adding value to the property.
• Choose interest-only payments: If your lender offers interest-only payment periods, you can reduce your monthly debt service in the short term to improve your DSCR.
• Extend your amortization period: A 30-year amortization spreads the loan payments over more years, which lowers your monthly and annual debt service.
• Choose fixed over adjustable rates: Fixed-rate loans protect against rising interest rates, which keeps your DSCR stable.
• Refinance to lower interest rates: If interest rates drop, you can refinance to reduce your debt service.

An experienced DSCR lender like Park Place Finance can help you achieve the optimal balance for your unique investment scenario.

Apply for a DSCR loan with Park Place Finance

Park Place Finance is a direct hard money lender with in-house capital.

Use our DSCR loan product to purchase or refinance your rental property with a 30-year fixed, competitive rate without using tax returns or personal income to qualify.

Submit your DSCR deal here, or call us at (866) 407-1599.