1. What is a DSCR Loan?
A DSCR loan, or Debt Service Coverage Ratio loan, is a type of loan where the lender evaluates the borrower’s capacity to repay the loan by looking at the ratio of the property’s net operating income to its total debt service. The DSCR is a measure of the cash flow available to pay current debt obligations.
2. How is DSCR calculated?
DSCR is calculated by dividing the net operating income (NOI) of a property by its total debt service (TD)
DSCR = Net Operating Income / Total Debt Service
3. What is a good DSCR?
A good DSCR generally ranges from 1.15 to 1.35. A DSCR of less than 1 indicates that there is not enough cash flow to cover debt obligations, which is a red flag for lenders. On the other hand, a DSCR above 1 indicates that the property generates sufficient income to repay its debts.
4. Can I get a loan with a low DSCR?
It may be challenging to secure a loan with a low DSCR as it indicates a higher risk of default. However, some lenders may still extend credit if the borrower can provide additional collateral or if there are other mitigating factors.
5. How can I improve my DSCR?
Improving your DSCR involves either increasing your net operating income or decreasing your total debt service. This could be achieved by increasing rents, cutting unnecessary expenses, or refinancing current debts to lower payments.
6. Do all lenders use DSCR?
While DSCR is a common tool used by lenders to assess a property’s ability to repay a loan, not all lenders use it. Some lenders may place more emphasis on credit scores, collateral, or other financial ratios. A DSCR loan is typically a commercial loan.
7. How does DSCR affect my interest rate?
A higher DSCR may result in a lower interest rate as it indicates lower risk to the lender. Conversely, a lower DSCR may result in a higher interest rate to compensate for the increased risk of default.
8. What happens if my DSCR changes during the loan term?
If your DSCR changes significantly during the loan term, your lender might reassess your loan conditions. If your DSCR decreases significantly, it could result in a default on your loan agreement, depending on the terms set by your lender. Usually – if you have a recourse loan (you personally guaranteed the loan) – there might not be a reassessment – unless you have payment issues.
9. Can I get a DSCR loan for a startup?
While it is more challenging for startup investors to get a DSCR loan because they often lack the historical net operating income to calculate the ratio, it is still possible. Lenders might consider projected income, the entrepreneur’s experience, and the viability of the business plan.
10. What is the difference between DSCR and DTI?
While both DSCR and DTI (Debt-to-Income) ratios are used to evaluate a borrower’s ability to repay a loan, they are used in different contexts. DSCR is typically used for businesses and commercial real estate loans, while DTI is used for individual borrowers, such as home loans and personal loans.
11. Why would I want to consider a DSCR loan?
If you have multiple loans that are considered conventional or underwritten by Fannie Mae or Freddie Mac as a residential loan – these loans appear on your personal credit report. A DSCR loan is usually given to an entity – such as your LLC. Removing the DTI loans from your credit report might allow additional personal credit flexibility.
12. Can I use a DSCR loan to purchase or refinance a portfolio of properties?
Yes! Many Blanket Portfolio Loans use DSCR to evaluate the entire portfolio of homes. You also make one payment on the portfolio rather than individual loans.