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DSCR Loans Explained: Everything You Need To Know

IN THIS PAGE:

What is a DSCR mortgage? 
How do DSCR loans work? 
Jumbo Loan Requirements.
Who can benefit from a DSCR mortgage? 
DSCR loan vs. traditional mortgage.
Pros and cons of DSCR mortgages.
DSCR loan requirements.
Minimum down payment requirements chart.
Credit scores & interest rates on a DSCR loan.
How to apply for a DSCR loan program.
Alternatives to DSCR mortgages.
DSCR loan FAQs.
Let’s Get You Started!

What is a DSCR loan? 



DSCR loans are a type of mortgage that uses the income of an investment property instead of tax returns to qualify for a mortgage loan. Unlike regular mortgages, the government (through Fannie Mae and Freddie Mac) doesn’t guarantee these loans. 




How do DSCR loans work?

The DSCR loan meaning stands for Debt Service Coverage Ratio loan, which is a type of mortgage used for purchasing short-term or long-term rental investment properties. With a DSCR loan, borrowers can qualify for a mortgage based on a property’s rental analysis. No personal income or employment information is required to qualify. Debt service coverage ratio or DSCR is a measurement of a property’s expected cash flow to determine ability to repay a mortgage loan. It is calculated by dividing the borrower’s net operating income by their debt obligations, including the debt payment.

Who can benefit from
a DSCR mortgage?


DSCR lenders can be a good option for people who:

Have income that can’t be documented traditionally with paystubs, W2s, tax returns, or bank statements.
Only for the purchase or refinance of an investment property. 

DSCR loans Florida
may be helpful for:

Self-employed borrowers
Gig workers looking to buy a home
Small business owners
Independent contractors
Consultants
Realtors
Freelance employees
Entrepreneurs
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DSCR mortgage vs. traditional mortgage

DSCR loans or a personal DSCR mortgage program allows you to verify your income on a mortgage loan application using the appraisal schedule of the property you are buying instead of tax forms. Traditional mortgage loans use tax returns, W2s, and pay stubs to verify monthly income. 

 Interest rates may be the highest with DSCR loans, so borrowers should try to qualify with tax returns first and bank statements second, if possible. 

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DSCR Loan Pros and Cons

They differ from traditional mortgages in their requirements for documentation, credit score, and debt-to-income ratio.

Pros 

Flexibility: Loans are easy, and can be more flexible than traditional mortgages in terms of documentation
There is no Debt to Income Ratio. 
The property income determines the income in the loan application, instead of tax returns or bank statements. 
There could be no rental income verification either, for a complete true no mortgage income or rental income verification.
Vacant properties are allowed.
There is no limit on the total number of properties.
Purchase and cash-out or rate-term refinance.
30-year interest only available.
Non-warrantable condos are allowed.
Non-permanent residents are allowed.
Condotels are allowed.
Short-term rentals allowed, with AirDNA reports accepted.

Cons

Higher borrowing costs: DSCR loan interest rates may have higher interest rates and fees than other types of mortgages..
Larger down payment: DSCR mortgages may require a down payment as low as 15%, but this may be higher if the credit score is low.
Prepayment penalties: DSCR mortgages may come with prepayment penalties.
Most lenders don’t offer DSCR loans.
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DSCR Loan Qualification Requirements

Here are some common requirements:

A credit score of at least 680.
A down payment of at least 15% (see down payment requirement chart below).
Adequate cash reserves, with a minimum of six months of mortgage payment reserves
Escrow for taxes and insurance.
A second appraisal on purchases over $1,500,000.00
Forty-eight months of seasoning from credit events like bankruptcies, foreclosures, or short sales.
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Minimum down payment requirements chart for DSCR loans

The minimum down payment requirement depends on your credit score. The lower your credit score, the more you will have to put down and the higher the interest rate will be. The higher the credit score, the less you will have to put down and the lower the DSCR loan rate.

Credit ScoreMinimum Down Payment
680 to 69925%
700 to 71920%
720 or higher15%
740 to 75915%
760 or higher15%
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How does credit score affect interest rates on a DSCR loan?

A person’s credit score can affect the interest rate on a DSCR loan because lenders may charge different interest rates based on credit score. Generally, you can qualify for a DSCR loan with a credit score as low as 680, but a 760 or higher gets you a better rate and terms. If your credit score is on the lower end, though, you might also need to make a larger down payment.

Credit ScoreMinimum Down Payment
680 to 699+ 1.500%
700 to 719+ 0.625%
720 to 739+ 0.250%
740 to 759+ 0.115%
760 or higher–

Interest rate risk surcharges are not the same as the interest rate you’ll see on your loan statement. Instead, it’s an additional amount lenders may charge on top of the base rate. This surcharge is typically applied to borrowers with lower credit scores, usually below 760.

For example, if you have a credit score of 680 and the base interest rate for a loan is 7%, you might be charged an interest rate surcharge of 1.5%. This would mean your total interest rate for the loan would be 8.5% (7% base rate + 1.5% surcharge).

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How to apply for a DSCR loan

Bluecastle Lending can find you the best DSCR mortgage lenders. As one of the top-producing mortgage brokers near you, Bluecastle has partnerships with several wholesale lenders, which gives us access to a variety of unique types of mortgages and deals, including the best DSCR mortgages.

Here’s how to move forward:

Step 1

Get preapproved. Fill out the online loan application questionnaire. Bluecastle will not run your credit until we speak with you, but this will start the process of getting preapproved.


Step 2:

Upload your documents into our portal. Your online portal will be created, so you can easily upload your documentation.





Step 3:

We will submit your loan. The nature of these loans often results in loan denials. To avoid this, Bluecastle has a policy of submitting the loan to the best mortgage lender for you, who will ultimately fund the loan.

Step 4:

Start shopping for a single family home or condo. Once we get the approval, we set up your portal with your loan options, payments, cash you will need, and you can confidently start shopping for a house!

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Do I qualify for the $10,000.00 Closing Cost Assistance Credit Offer doing a DSCR Loan?

Yes you do! You can get up to $10,000.00 from Bluecastle Lending when you bundle your services with Bluecastle Realty & Bluecastle Title! Plus, refinance higher interest rates on us when the mortgage rates drop! See each offer for more details, terms, and conditions.

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Alternatives to DSCR loans

DSCR loans are one way for people — like self-employed individuals or gig workers — to borrow money, but there are other mortgage loan options. These alternatives include:

Bank statement loans: If you’re a real estate investor, you might qualify for a debt service coverage ratio (DSCR) loan, which income is determined based on your bank deposits. This loan interest rate will be slightly lower than a DSCR loan. 
Conventional loans: They tend to offer much better interest rates and terms compared to DSCR loans, bank statement loans, and jumbo loans. 
Jumbo loans: A jumbo loan will typically have a higher interest rate than a Conventional mortgage, stricter underwriting rules, and a larger down payment than a standard mortgage. However, the interest rate will be lower than a DSCR loan.
FHA loans:: FHA loans are especially popular among first-time homebuyers due to their flexible approval criteria. They are for primary residences only. 
VA loans: Eligible service members, veterans and surviving spouses can obtain a VA-backed mortgage with no money down. They are for primary residences only. 
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DSCR loan FAQ

What is the minimum required and maximum DSCR loan amount?

The minimum loan amount is $100,000.00, and the maximum generally is $3,000,000.00. Higher loan amounts are on a case-by-case basis. 

Can I use DSCR mortgages for a home purchase or a refinance?

DSCR home loans can be used to purchase your next home or refinance your current mortgage. There are two types of refinancing options. Rate & term refinance is often used by homeowners to get a lower interest rate and more affordable monthly mortgage payments, or you can get a cash-out to refinance, which allows you to pull equity out of your home and convert it into cash. 

Can I get a DSCR loan if I am not self-employed?

Yes you can however,  requirements can vary among lenders. For example, if you can demonstrate a consistent and stable income through your DSCRs, you may be eligible for a DSCR loan.

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