Question 1

What credit score do you need for a DSCR loan?

Accepted Answer

There is no fixed credit score requirement for a DSCR loan, but most lenders prefer borrowers with good to excellent credit scores, typically above 680. A higher credit score increases the likelihood of getting approved for a loan and can also help negotiate better terms and interest rates.

Question 2

What is the importance of DSCR in credit underwriting?

Accepted Answer

DSCR is an essential factor in credit underwriting because it provides a snapshot of the borrower's ability to repay debt. Lenders calculate DSCR to determine if the borrower generates enough cash flow to cover debt payments. A high DSCR indicates that the borrower is financially stable and can comfortably afford to repay the loan, while a low DSCR suggests that the borrower may have difficulty repaying the debt.

Question 3

What is the typical interest rate for a DSCR loan?

Accepted Answer

The interest rate for DSCR loans varies depending on several factors, such as the loan amount, loan term, credit score, and lender policies. Generally, the interest rates for DSCR loans are higher than traditional mortgage loans due to the higher risk associated with these loans. The interest rates can range from 4% to 12%, depending on the lender.

Question 4

How long is the DSCR loan term?

Accepted Answer

The DSCR loan term varies depending on the lender and the borrower's financial situation. The term typically ranges from 5 years to 30 years, with some lenders offering customized loan terms as per the borrower's requirements.

Question 5

What is an example of a DSCR?

Accepted Answer

Suppose a borrower has a net operating income of $100,000 and a total debt service of $80,000. In that case, the DSCR would be calculated as follows:
DSCR = net operating income / total debt service DSCR = $100,000 / $80,000 DSCR = 1.25
This means that the borrower generates enough cash flow to cover the debt payments, meeting the lender's minimum requirement of 1.25.

Question 6

What is the maximum loan-to-value (LTV)?

Accepted Answer

The maximum LTV ratio for DSCR loans is generally around 75%-80%. This means that the borrower can obtain a loan of up to 75%-80% of the property's appraised value.

Question 7

What happens if DSCR is more than 2?

Accepted Answer

If the DSCR is more than 2, it indicates that the borrower generates ample cash flow to repay the loan, which is a positive sign. However, this does not guarantee approval of the loan. The lender will also consider other factors such as credit score, collateral, and debt-to-income ratio before approving the loan.

Question 8

What happens if DSCR is not met?

Accepted Answer

If the DSCR is not met, it indicates that the borrower may have difficulty repaying the loan. In such cases, the lender may reject the loan application or offer a lower loan amount or higher interest rates.

Question 9

What is the formula for cash DSCR?

Accepted Answer

Cash DSCR is calculated by dividing the cash flow from operations (CFO) by the total debt service (TDS). The formula for cash DSCR is as follows:
Cash DSCR = Cash flow from operations / Total debt service

Question 10

What are 90% loan-to-value (LTV) loans?

Accepted Answer

A 90% LTV loan means that the borrower can obtain a loan of up to 90% of the property's appraised value. However, these loans typically come with higher interest rates and may require mortgage insurance.

Question 11

What is a default DSCR?

Accepted Answer

The default DSCR is the minimum DSCR required by the lender in case of default. It is usually set at around 1.0 or slightly above the breakeven point, indicating that the borrower should generate enough cash flow to cover debt payments even in case of default.

Question 12

How can I improve my DSCR?

Accepted Answer

There are several ways to improve your DSCR, such as increasing rental income, reducing expenses, refinancing debt, and increasing property value. You can also consider paying off high-interest debt, leasing vacant spaces, and exploring other sources of income to increase

FAQs About DSCR Loan

What is A DSCR Loan ?

Now, let’s move on to the FAQs about DSCR loans.