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Can You Get a DSCR Loan Without Down Payment? | Guide for Real Estate Investors

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As a real estate investor, you’ll never be short of funding options. FHA loans, hard money loans, blanket loans… the list goes on. 

DSCR loans are another such type of mortgage, but like any other home loan, they come with hefty down payments. This is the main deterrent for new investors, who may wonder, “Can you get a DSCR loan with no down payment?”

While some lenders may say otherwise, it’s not possible to get a DSCR loan without a down payment. A lender who offers such a loan may not be reliable or trustworthy. 

Here’s what budget-conscious investors should know about DSCR loans instead. 

What is a DSCR Loan?

A debt service coverage ratio (DSCR) essentially measures a property’s financial health. It’s a ratio of the property’s owed amount (debt service) to its net operating income (coverage). 

This type of loan focuses on the property’s DSCR instead of the borrower’s personal income. That means the lender will assess the property’s ability to make enough income to cover the debt. This income typically comes from renting. 

The good thing is that DSCR is pretty easy to calculate, so lenders and borrowers can be sure they’re investing in the right property. 

Most DSCR lenders prefer a ratio of at least 1.2. Any DSCR over 1.0 means the property income can easily cover the debt, but 1.2 or higher leaves room for profit, too. For the lender, that makes you a low-risk borrower.

Ideally, it’s wise to look for properties with a 2.0 ratio since it means they can cover the debt two times with no trouble. 

Benefits of DSCR Loans

No Personal Income Verification Required

As we mentioned, the property’s NOI covers all the debt of a DSCR loan. That means the lender does not need to verify your personal income or employment details. So, this loan can be helpful if your income is complex or hard to verify.

This is also a great option for new investors since their personal tax returns don’t show much income. In fact, most people turn to real estate investment to avoid employment taxes in the first place. 

No Property Limit

Most DSCR lenders don’t limit the number of properties you can fund with the loan. You won’t need to pay off a previous property to invest in the next one. This can be great for those who want to expand their portfolio but feel restricted by traditional loans.

Easier to Qualify

DSCR loans don’t require any verification of your personal finances, making them much easier to qualify for. All you need to do is find a profitable property that can cover the debt with its income. Since you won’t need to provide too much liquid capital upfront as the DSCR down payment, it even works for the self-employed.

Quicker Applications

It takes much less to qualify for a DSCR loan, which means they also close quicker than traditional mortgages. Lenders don’t need to check your personal income or employment history. Plus, DSCR loans often come from private lenders who have the luxury of making quicker decisions.

Diverse Funding Options

Beyond just financing multiple properties, DSCR loans also allow you to finance different types of properties. With traditional mortgage loans, you’re limited to just residential units. Meanwhile, DSCR loans can be used for many different types, including:

  • Single-family residential properties
  • Commercial and multi-family properties
  • Short-term and vacation rentals

Approval According to the Deal

If you’re lucky, the lender may approve your DSCR loan even if it doesn’t meet the requirements to a tee. As long as it's a great deal, you might be able to get the funding you need. If you’ve found a property you’re really confident in, you won’t need to sweat the small stuff.

That means you might get a DSCR loan – no down payment, no credit check. However, it’s very rare to find a lender who will let you borrow without a down payment.

DSCR Loan Qualifications

DSCR loans are a lot easier to qualify for than other real estate financing options. Of course, there are still some demands you need to meet. 

For instance, DSCR loan credit requirements are very flexible – most lenders would even accept 620 to 680. Your chosen property must also have a minimum DSCR of 1.2, but 2.0 is ideal and preferred. 

Meanwhile, lenders typically demand a loan-to-value (LTV) ratio of 75–80%. This translates to DSCR loan down payment requirements of 20–25%. 

You may have read otherwise, but it is not possible to get a DSCR loan without a down payment. It’s extremely rare to find a lender willing to fund a property without a down payment, but even if you find one, it could possibly be a scam. 

Improving Your Chances of Getting Approved

There are two surefire ways of improving your chances of getting accepted for a DSCR loan: minimize your debt and keep an eye on your credit score.

Borrowers with a large amount of debt are considered high-risk since lenders aren’t sure whether they can repay the loan. The property income may be substantial, but there’s no guarantee whether it’ll be used to pay back the current loan or an older one. Paying off some of your debt before getting a DSCR loan will make you a low-risk borrower. 

Secondly, a good credit score shows that you have a history of paying back your loans on time. While a 680 score is acceptable, anything higher will definitely improve your chances of getting accepted. 

Still, it’s always wise to work with a financial advisor and have a backup plan in case your application is not accepted. 

The Process of Applying For a DSCR Loan

Here’s a complete breakdown of what the DSCR loan application can look like. 

  1. Find a Lender: First, find a bank or lender specializing in DSCR loan programs. Keep reading to find a guide to finding a reliable lender for DSCR loans. 
  2. Fill Out a Loan Application: Once you've selected a lender, fill out a loan application. You’ll find the form on the lender's website or by contacting their office. You’ll need to provide proof of credit, real estate investing experience, and details about the property. 
  3. Calculate Your DSCR: Calculate your Debt Service Coverage Ratio (DSCR) using the formula provided below. The DSCR should ideally be greater than 1.00, which means that the property generates enough rental income to cover the loan.
  4. Lock in Your Interest Rate: After calculating your DSCR and submitting your application, the lender will offer you an interest rate. You can lock in this rate before you move to the final steps of the loan approval process.
  5. Get Approved: If your application is qualified, you will receive approval for the loan. DSCR loan requirements are pretty simple, so the closing process will be fast.
  6. Loan Funding: Once approved, the loan will be funded as a line of credit or lump sum. The loan amount will be deposited into your escrow account. You’ll need to pay for an appraisal and undergo the underwriting process before finalizing the loan.

Finding the Right Lender for a DSCR Loan

Finding the right lender for a DSCR loan is key to getting a good deal. If you’re very lucky, you may even find a lender willing to accept a smaller down payment. However, don’t fall for lenders who say they’ll offer a DSCR loan with no down payment – they may be scamming you. 

Here’s a guide to help you find a reliable DSCR lender. 

Certifications and Accreditations

Before you accept an offer from a DSCR lender, ask for proof of their experience and credibility. That includes a certification of good standing, certification of formation, articles of organization, and an IRS EIN letter.

Loan Terms and Amount

The lender’s interest rates and origination fees should be aligned with your financial limits. You may not find the cheapest options, but comparing your options may make them easier to afford. It’s also possible to find a lender who is willing to fund up to $5 million, so don’t settle for less. 

Before you agree on the deal, read the fine print of each lender's loan terms. That includes the repayment terms and how frequently you’ll be paying. 

Reviews and Testimonials

You can tell a lot about a lender’s expertise by the experiences of previous clients. Visit the lender’s website to read reviews and testimonials – keep an eye out for details about the repayment terms and interest rates. 

How to Calculate DSCR Loan Ratio

The DSCR determines the property’s ability to cover the loan amount. It’s calculated during the loan approval process by the lender and the borrower. 

To calculate the DSCR, you’ll need to know the property’s net operating income (NOI) and total debt. The NOI is basically the property’s income before any interest or tax. Here’s a simple formula for DSCR:

DSCR = Net Operating Income / Total Debt Service 

Where:

Net Operating Income = Income − COE

COE = Certain operating expenses

Total Debt Service = Current debt obligations

For example, if a property has a NOI of $500,000 and a TBS of $400,000, the DSCR would be:

DSCR = $500,000 / $400,000 = 1.25

What To Know Before Getting a DSCR Loan

While DSCR loans can offer many benefits, it’s crucial to do your research before you invest in one. Regardless of what a lender may tell you, you cannot avoid a down payment. Here’s what you should know about this loan type before you make a choice.

Higher Interest Rates

DSCR loans have better returns, but that also translates to higher interest rates than traditional home loans – around 7.7% as of March 2024. Still, it’s possible to get a better rate by increasing your down payment or offering a DSCR of at least 1.25.

High DSCR Required

Most lenders expect a DSCR of no less than 1.2, which means the property’s NOI can cover 120% of the loan. But if you want a good deal, aim for 1.5, which isn’t easy to achieve in an expensive real estate market like Manhattan or San Jose. A 1.5 DSCR means the property income can fully cover the debt and still leave 50% of the loan amount.

Six Months of Cash Reserves

In some cases, the renter whose rent payments are covering your debt may end their tenancy. That means you can no longer pay back the loan. 

Responsible lenders like to keep backup plans for such scenarios. For some lenders, this backup plan can be the money in your bank account.

That means you may need to keep three to six months of payments, or cash reserves, in your account. This way, you can keep the payments going while you find a new tenant. Luckily, not every lender demands this. 

Loan Limits

Some properties are too expensive to be fully funded by a DSCR loan. Most lenders cap out at $1 to $3 million. If you’re lucky, you may even find a private lender willing to offer $5 million. 

These limits may seem restrictive to seasoned investors but they’re generous enough for most single-family homes, duplexes, or even triplexes. Those looking into larger complexes should go for a commercial real estate loan.

Prepayment Penalties

DSCR loans are not consumer products, so typical consumer protections don’t apply. That includes the ban on prepayment penalties. Before you make an investment, take your time to read the loan’s terms or hire a financial advisor to do so.

Conclusion

DSCR loans are a great option for new investors looking for speedy, low-effort terms. While there’s no way to avoid the down payment, you can explore your options to find a lender with low interest rates and down payments. 

If you are offered a DSCR loan with no down payment, it’s crucial to stay wary of a loan scam. Hiring an expert financial advisor is the best way to put your mind at ease. Our experts at Truss Financial Group will read the fine print to make sure your chosen lender is reliable. 

Contact us today for a consultation. 

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