DSCR Loans

What Is Debt-Service Coverage Ratio (DSCR)?

If you are looking to start investing in real estate or expand your portfolio, a commercial DSCR loan may be the right option for you. Commercial DSCR real estate loans allow you to qualify for financing without needing to provide traditional income verificationdocumentation.Commercial DSCR loans are a great option for investors purchasing or refinancing 1-4 unit properties in the name of an LLC.

Instead of requiring proof of income, DSCR real estate loans are based on the debt service coverage ratio of the property, which provides insight into the property’s cash flow. Learn more about commercial DSCR loans at Griffin Funding and how they can help you invest.

Pros of DSCR Loans

DSCR loans provide great flexibility, allowing real estate investors to find alternative ways to fund their projects. Here are the top three benefits of DSCR loans you should have in mind

Lenders Don’t Consider Personal Income

One of the significant advantages of a DSCR loan is that it does not require employment verification, disclose any leases, or present proof of income. Instead, the lender is only interested in the cash flow generated by the subject property. 

DSCR Loans Can Offer Quicker Closing Times

While loan processors and underwriters typically examine your paystubs and conduct background checks on your employment history, these steps are skipped in the DSCR process. This results in a faster close than with commercial loans.

DSCR Loans Can Offer Quicker Closing Times

Some loans require you to make a one-time commitment to a single property. You won’t be able to get a loan for a second property until you’ve paid off your first. However, that’s not how DSCR loans work. You can take out many loans for different properties simultaneously to scale your business faster.

Cons of DSCR Loans

Despite the great flexibility of DSCR loans, you should consider some potential downsides before deciding.

Terms

The down payment needed can range from 20% to 25%, depending on the lender. Additionally, you’ll need to pay lender and service fees, ranging from 0.5% to 1% of the entire loan. DSCR mortgage rates are typically 1.000% to 2.000% higher than rates on traditional loans. If there is no lease on the property and the estimated rental revenue is based on an appraisal report, the interest rate may be higher.

Limited Financing

Even though DSCR rates and terms are comparable to other types of loans, they provide more limited financing. So if you need more than $5,000,000, DSCR loans might not be your best option.

Why DSCR Loans Make Sense

The usual method of determining whether or not you qualify for a mortgage loan is to look at your income and make sure that you earn more than the mortgage payments and costs. This is a difficulty for self-employed investors who can’t prove their income and those who are creating a significant rental portfolio. Even if an investor has a high-paying career, their money debt payments may outpace their personal gain if they own many mortgaged rental properties.

DSCR loans allow you to separate your business and personal affairs, don’t dig as deeply into personal records as other loan products,

and have a faster closing time than other loan products. On the other hand, you should expect slightly higher down payments, mortgage rates, and less overall financing. So, while no loan is perfect, the DSCR is an appealing alternative for real estate investors.

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