DSCR loans have a slightly higher interest rate than conventional loans because they are a riskier type of loan. DSCR mortgage rates are often anywhere between 1% and 2% higher than conventional loans. This is due to two main reasons:
- Rental property is viewed by lenders as a riskier investment and DSCR loans are based on the income of the rental property being enough to cover the debt. When there are months of no income, this could therefore impact the loan repayments.
- No personal finance information is required, and DSCR loans are based entirely on the property’s income generation to cover the loan. This means that there is no responsibility on real estate investors, and loan repayment hinges on the property maintaining a positive cash flow.
To get a lower DSCR loan rate there are few options:
- Pay a larger down payment
- Choose a property with a higher DSCR
- Look at an adjustable-rate loan
- Use points, if you have enough money
- Improve your credit score
According to Bankrate, as of 16 September 2024, the average rate for a conventional 30-year fixed mortgage is 6.31%. The average loan rate on a 15-year fixed mortgage is 5.62%, while a 5/1 ARM loan is 5.86%. This means that the average loan rate on a conventional 30-year fixed mortgage is anywhere between 0 and 2% lower than the average DSCR loan rate, in most cases.
Debt Service Coverage Ratio is a key indicator of an investment or business’s ability to generate sufficient income to repay debt. It is measured by taking the net operating income (NOI) of a property, for example, and dividing it by the total debt that needs to be serviced. This formula works off the annual amount of debt that needs to be covered.
DSCR is a ratio used by many lenders to show whether a property will produce enough income to cover the loan repayments. A DSCR of 1, means that the investment will generate enough income to cover 100% of the debt, but there will be no funds left once the debt has been paid.
DSCR loans are offered by a variety of lenders such as banks, credit unions, private lending companies and mortgage companies. To find direct lenders you can look online for private lending companies, or you can go via companies that will help you find the best lender for DSCR loans. You can also consult with other real estate experts or attend real estate investors’ networking events to find lenders that are recommended by others in the industry.
Once you’ve found some options, you can explain your situation to them in terms of the real estate deal that you’ve found and the type of loan you’re looking for. They will be able to assess your case and then let you know if they have a DSCR loan to suit your needs. Once you’ve found the right lender who can provide the most well-suited loan, you can begin the application process.
Yes, there are traditional lenders who provide DSCR loans. However, private lending companies are generally more likely to provide these loans as they are willing to take on the higher risk and be more flexible with loan terms. Whichever lender real estate investors choose to go with, it’s important to make sure that the DSCR is above 1.2, as most lenders will need the ratio to ensure that the property’s income can comfortably cover the loan repayments each month.
