DSCR LOANS 201

A “conventional” DSCR lender will still provide disclosures (such as formal Loan Estimates and Closing Disclosures), and they will have more stringent documentation and underwriting requirements. For example, they may want to collect leases and/or mortgage statements on all properties you own, confirm that you’ve been current on all properties that you own (including your primary residence) for the past 12 months, ask for multiple LOEs (especially the purpose of cash-out), etc. If you don’t own a lot of properties, this may not be much work, but if you do own a lot, especially if they don’t show up on your credit report, it may take some effort to “unravel” those properties. The advantage of these loans is that they’re typically a little cheaper, but they often still report to your credit report (although some lenders won’t if the property is held in an LLC).

A “hard money” DSCR lender will ask for much less documentation and is easier to work with, but they are often higher priced. However, they offer much more flexible products that fit more scenarios, they usually don’t report the loan to the credit bureaus (but always ask), and they don’t cap how many loans you can have.

TYPES OF DSCR INCOME

You can get a standard DSCR loan if you have at least a 1.00x DSCR ratio (where your cashflow is breakeven, i.e., rents = PITI). You may get a slight rate discount if you have good cash flow, which could be defined as 1.15x, 1.2x, or 1.25x, depending on the lender.

If the property doesn’t have cash flow, you can still get a DSCR loan. The next tier down is either 0.75x or 0.8x. This means your rent is 25% or 20% lower than your mortgage payment. Usually, these DSCR loans are more expensive (somewhere between 0.5% - 1% higher in rate), and oftentimes your max LTV is lower as well.

Below 0.75x, you enter the territory of a “No Ratio” DSCR loan, which means there is no minimum (or I guess technically the minimum is 0.00). It’s odd to have a cashflow-based loan based on no cashflow at all, but it does exist. Expect interest rates to be at least 1.5% higher than standard DSCR rates, as well as lower LTVs and fewer prepayment penalty options.

Note that DSCR loans are primarily based on long-term rents, often the lower of actual rents vs market rents (which is derived from the appraisal). If you are renting the property for higher than market rents, most lenders will use the lower market rent towards their DSCR calculation. However, if you’re renting below market value, most lenders will take your rent. Unlike a conventional loan, where a lower appraised value can affect your loan amount, a DSCR loan amount can be affected by two things: the appraised value or the market rent.

There are lenders that will take the higher of actual vs market rents, or they’ll take the higher actual rent if you can provide proof of at least 3 months of it. However, this is not the norm, and thus you will pay a little higher for it.

DSCR loans based on short-term rental (STR) income (such as AirBNB or VRBO) also exist, but you often pay a little bit of a higher rate for it as well. Some of these lenders will want to see the last 12 months of STR history, while others can use market rent from AirDNA.

Note that other types of cashflow strategies, such as rent-by-the-room (including PadSplit), adult family, sober living, supported living, group homes, etc., are extremely difficult to get a DSCR loan on. It is possible, especially when tied to a “no ratio” DSCR loan, but the rates are much higher than a standard DSCR loan. The best way to get a loan on these properties is to finance them before you start renting them out.

REPORTING TO CREDIT

To be clear, you still need to have decent credit (usually at least in the high 600s) to get a DSCR loan. What I’m talking about is whether the loan will show up on your credit report after you close. There are two main reasons why not reporting to credit is a big advantage:

1. If it doesn’t show on your credit, it may not affect your ability to get other loans that are more DTI-based, including conventional loans, HELOCs/HELOANs, and bank statement loans (which we can talk about another day). There are arguments on whether it can still count against your DTI and whether you need to disclose them anyway, but it all depends on how your loan officer structures your financing and the type of loan you are trying to get (this is more of a 300-level strategy).
2. The more properties and loans that report to your credit, the more chances you have of something going wrong and affecting your credit. I know plenty of great borrowers who, by no fault of their own, have a late payment show up on their credit because their ACH failed to pull, and they didn’t catch it in time. But not having these loans report to your credit, it’s much easier to maintain your credit.

DSCR lenders either do one of 3 things

1. They will always report to your credit (usually more conventional DSCR lenders).
2. They will sometimes report to your credit (oftentimes, this is due to whether you are taking the title in your personal name or in an entity).
3. They will never report to your credit (usually more hard money DSCR lenders)

You should ask every DSCR lender you talk to whether they report to your credit. Note that lenders don’t have full control over this since it’s the servicer that does the credit reporting, and sometimes the servicer makes mistakes and reports the loan to the credit when they aren’t supposed to (but you should be able to fight this). However, hard money DSCR lenders often use servicers that don’t report to credit, whereas conventional DSCR lenders use servicers that do.

PREPAYMENT PENALTIES

This article is getting long, so I’ll make this the last topic for this 200-level course.

Prepayment penalties (“prepay” for short) are all over the place. There are two main types of prepays: fixed and step-down. Then you have the prepay length, which ranges from 0 (i.e., no prepay) to 5 years. Fixed prepays and longer prepay terms usually get you the best pricing.

A fixed prepay is the same across the entire prepay term. For example, a 3-yr fixed prepay could mean 3-3-3, which means you pay 3% (of the loan balance) if you pay off the loan in the first year, 3% in the second year, 3% in the third year, and then no prepay after that. A 3-yr fixed prepay could also mean 5-5-5, which means you just pay 5% anytime you pay off the loan within 3 years.

A step-down prepay gets lower each year you’re into the loan. For example, a 3-yr stepdown could mean 3-2-1, which means you pay 3% if you pay off in the first year, 2% the second year, and 1% the third year. However, you could also have a 3-yr stepdown as a 5-4-3.

YOU ALWAYS NEED TO ASK EXACTLY WHAT THE PREPAY IS! Do not assume a 3-yr stepdown is 3-2-1! Note that a 1-yr prepay is often either 3% or 5%; it’s rare these days to find a 1% 1-yr prepay.

I see so many lenders giving borrowers a 5-year prepay these days, and I do not believe it is in the borrower’s best interest. Most of us expect to refinance into lower rates within a couple of years. And most of us can’t predict emergency situations where we need to sell the property immediately. Not only is a 5-year prepay a longer term, but oftentimes it hurts much more than a 3-yr prepay if you happen to need to sell the property in the first year (5% vs 3%).

I normally try to get a 3-year stepdown prepay. The rate is usually an eighth or fourth of a percent higher than a 5-year, but it’s worth it for the flexibility it gives you. You can try to buy down to a shorter prepay, such as 1-yr or 2-yr, but the pricing gets hit pretty hard (and it’s already hard enough to cash flow). It’s usually not worth it to get a no prepay DSCR loan; you should consider whether a bridge loan makes more sense.

Hopefully, this helps you find a better DSCR loan with whichever lender you're talking to! Feel free to message me if you want a second opinion on something.

Flynn Family Lending is a local private lending company based in Renton, WA specializing in creative financing solutions. We help real estate investors unlock equity and seize opportunities quickly—without the red tape of traditional lenders. Please visit our website at

www.flynnfamilylending.com to learn more, or you can contact us at sales@flynnfamilylending.com or 1-833-359-6648.