Hard Money Experts

DSCR Loans: Everything You Need to Know

A DSCR loan is a real estate loan issued based on a property’s income, as defined by its debt service coverage ratio (DSCR), instead of the borrower’s specific qualifications. DSCR is a metric that compares a property’s monthly income to its debt service, as defined by its principal and interest (P&I) payment.

As a type of asset-based mortgage, most DSCR loans are issued by hard money or private money lenders and are often considered hard money loans. DSCR loans are sometimes called non-QM loans (non-qualified mortgage loans), particularly when issued by conventional lenders or used for owner-occupied properties.

Like other kinds of loans issued by alternative lenders, DSCR loans often have quick closings, and often don’t require credit checks or income verification. However, DSCR loan rates are often substantially lower than traditional hard money or private money loans. In addition to traditional buy and hold properties and fix and flips, DSCR loans can be ideal for short-term rental properties, such as those rented out on Airbnb or VRBO.

Debt Service Coverage Ratio (DSCR) is defined by taking a property’s net operating income (NOI) and dividing it by its debt service, as defined by its P&I (principal and interest). NOI is typically calculated by taking gross rental income and subtracting taxes, association fees, insurance, and miscellaneous expenses (like general maintenance or emergency repairs).

For example, if a property generates a net operating income of $2,000/month and the borrower’s P&I payment is $1,600/month, then the DSCR would be 1.25x. As a grammatical trend, an “x” is traditionally added to the end of a DSCR calculation, but this does not change its meaning.

Some lenders will calculate DSCR slightly differently. For instance, they use gross rental income and divide it by taxes, insurance, association dues, and miscellaneous expenses, but this is mainly a technical difference and will generally lead to the same result.

A DSCR of 1.0x is breakeven; the borrower/investor is neither gaining nor losing money each month after paying their mortgage. A DSCR of 1.25x is generally considered acceptable for most lenders, as it presents a healthy profit margin for the investor and a relatively low likelihood of loan default. A DSCR of 1.50x or above is considered excellent and a very safe bet for a lender.

• Loan Term: 6 months to 40 years, depending on the individual lender.

• Interest-Only Loans: Available, sometimes for periods of up to 10 years.

• Loan Amounts: $2.5- $5 million maximum, depending on the lender.

• LTV: Up to 80%

• DSCR:

  • Many lenders require 1.25x DSCR; however, some lenders permit DSCRs as low as .75, provided they have significant reserves (usually 12 months or more). DSCR loans for properties with DSCRs less than 1 typically have higher interest rates.

  • DSCRs as low as 0 are sometimes permitted with credit checks and lower leverage, particularly in fix and flip situations where a property may be temporarily vacant.

• Interest Rate: 3-7%+

• Origination Fees: 2-6%

• Credit Score: May or may not be required, depending on the lender.

• Appraisal: Required before funding. 

• Closing Timeline: Some lenders close in as little as 24 hours, while others may take between 3-4 weeks to close.

• Foreign National Loans: Available from some lenders.

Pros:

• Loan amounts up to $5,000,000

• Down payments as little as 20%

• Interest-only loan options available

• No income or job history verification required

• New real estate investors eligible

• No limit on the number of properties

• Unlimited cash out (from some lenders)

• Short-term rentals, such as properties using Airbnb or VRBO, are eligible

Cons: 

• Minimum credit score required by some lenders

• Lower DSCRs generally lead to higher interest rates.

• Reserves are typically required on loans with DSCRs less than one.

• Loan origination fees are still high, often between 2-6%

• Loans are full-recourse

DSCR loans work much the same as other types of hard money loans. Let’s say that an investor has purchased a property for $300,000, and can get an 80% LTV loan for $240,000. With an annual interest rate of 4.5% and a 30-year amortization, the monthly payment would be $1,216.

This means that if the lender’s minimum DSCR requirement was 1.0x, the minimum NOI would need to be $1,216. If it costs $200 a month for association fees, taxes, and insurance, this means the minimum rent would need to be $1,416 to achieve that 1.0x DSCR. If the property’s minimum DSCR was 0.75x, then NOI would only need to be $912, whereas if it was 1.25x, minimum NOI would need to be $1,520. At a minimum DSCR of 0, the property does not need to generate any income, which, as previously mentioned, is often the case for fix and flip deals.

Hard money, private money, and even conventional lenders offer DSCR mortgage loans. Some of the top DSCR lenders in the industry include:

1. AD Mortgage

   AD Mortgage is a Hollywood, Florida-based mortgage lender. Their DSCR loan program offers terms including:

• Loan Amount: Up to $2.5 million

• LTV: Up to 80% CLTV

• DSCR: As low as 0x

• Loan Term: 40-year and 30-year fixed rate loans, 5/6 & 7/6 ARM terms

• Income Verification: Not required

• Credit Score: 620+

• Down Payments: Cryptocurrency can be used for down payments, reserves, and closing costs.

• Foreign National Loans: Permitted for qualified borrowers

• Condotels: Permitted

2. Griffin Funding

San Diego-based Griffin Funding offers conventional and non-QM loans, including VA loans, USDA loans, asset-based loans, interest-only loans, bad credit mortgage loans, and residential and commercial property DSCR loans. Terms for their DSCR loan program include:

• Loan Amount: Up to $5 million

• LTV: Up to 80%

• DSCR: As low as 0.75x

• Loan Term: Varies based on individual deal

• Interest-Only Loans: Available

• Cash-Out: Unlimited

• Income Verification: Not required

• Credit Score: Minimum score required.

• Down Payments: Cryptocurrency can be used for down payments, reserves, and closing costs.

• Foreign National Loans: Permitted for qualified borrowers

Their program also has no limit to the number of properties financed and is also available for short-term rentals.

3. Coast2Coast Mortgage

Coast2Coast Mortgage is a Jacksonville, Florida-based mortgage lender. In addition to their DSCR loan program, they also offer FHA, VA, and USDA loans, jumbo loans, interest-only loans, graduated payment loans, and fixed-rate and adjustable-rate mortgages. Terms for their DSCR loan program include:

• Loan Amount: Up to $5 million

• LTV: Up to 80%

• DSCR: As low as 1.0x

• Loan Term: Varies

• Interest-Only Loans: Available

• Income Verification: Not required

• Credit Score: 620 minimum score required.

• Foreign National Loans: Permitted for qualified borrowers

Like Griffin Funding, their program also has no limit to the number of properties financed and is also available for short-term rentals. These loans are also available for first-time real estate investors.

4. California Hard Money Direct

California Hard Money Direct is a Los Angeles-based hard money lender offering residential and commercial hard money loans, fix and flip loans, distressed property loans, reverse mortgages, subprime mortgages, non-QM loans, and owner-occupied hard money loans, as well as several other lending products. Their DSCR loan program terms include:

• Loan Amount: $200,000 to $2 million

• LTV: Up to 75% for first-time investors, up to 80% for experienced investors

• DSCR: As low as 1.1x

• Interest Rates: 4.25% to 4.75% on average, depending on LTV and credit score

• Loan Term: 30-year fixed or SOFR ARMs with 5/6 or 7/6 terms

• Interest-Only Loans: Available

• Income Verification: Not required

• Cash-Out: Allowed for refinances only (up to 75% LTV)

• Credit Score: Minimum score required.

• Closing Timeline: 3.5 weeks average closing time

Like many lenders, California Hard Money Direct allows short-term rentals and will finance an unlimited amount of properties. Cash from cash-out refinances can be used for reserves, and transfer appraisals are accepted. Unfortunately, California Hard Money Direct only provides loans to California investors.

5. JMAC Lending

JMAC Lending is a popular Santa Ana, California-based hard money lender. Their DSCR loan program terms include:

• Loan Amount: Up to $3.5 million for properties with DSCRs 1.0x and above, up to $3 million for properties with DSCRs less than 1.0x

• LTV: Up to 75% for first-time investors, up to 80% for experienced investors

• DSCR: As low as 1.1x

• Interest Rates: 4.25% to 4.75% on average, depending on LTV and credit score

• Loan Term: 30-year fixed or SOFR ARMs with 5/6 or 7/6 terms

• Interest-Only Loans: Available

• Income Verification: Not required

• Cash-Out: Allowed for refinances only (up to 75% LTV)

• Foreign National Loans: Permitted for qualified borrowers

• Credit Score: No minimum score is required

Loans are available for single-family homes, condos, hotel condos, 2-4 unit properties, and short-term rental properties.

6. E Zip Mortgage by First Financial

E Zip Mortgage by First Financial provides a wide spectrum of loan options to borrowers, mainly focusing on owner-occupied homes. However, they do have loan options for investors as well. Their no income verification DSCR loan program’s terms include:

• Loan Amount: $200,000 to $3 million

• LTV: Up to 80%

• Interest Rates: 4% average rate

• Loan Term: 30-year fixed-rate mortgages available

• Interest-Only Loans: Available

• Income Verification: Not required

• Cash-Out: Allowed for refinances only (up to 75% LTV)

• Foreign National Loans: Permitted for qualified borrowers

• Credit Score: 660 minimum credit score.

The company puts no limits on the amount of properties finances. Only single-family homes, townhomes, and condos quality (not multifamily or commercial properties). Seller concessions are allowed up to 2%. There is a 3-year waiting period for foreclosures and bankruptcy.

7. Rental Home Financing

Rental Home Financing is a residential and commercial real estate lender offering blanket loans, commercial and multifamily loans, construction loans, hard money loans, long-term rental property financing, and, of course, DSCR loans for investment properties. Their DSCR financing program terms include:

• LTV: Up to 70%

• DSCR: 1.0x or more

• Interest Rates: Varies based on zip code

• Loan Term: 3/1, 5/, and 10/1 ARM without balloons, 30-year fixed and fully amortizing option also available

• Interest-Only Loans: Available

• Income Verification: Not required

• Cash-Out Refinances: Available

• Foreign National Loans: Permitted for qualified borrowers

• Credit Score: 620 minimum credit score.

• Closing Timeline: 3 weeks

Eligible property types include 1-4 unit residential properties, vacation rentals, multifamily buildings, and strip malls. Prepayment penalties are 3-5 year declining penalties, and borrowers generally need to have six months of payments in reserves.