The higher your property’s DSCR, the less risk it poses to lenders, which allows you to qualify for better interest rates and receive a higher loan-to-value percentage (LTV).
A DSCR loan is a type of loan that’s underwritten based on a property’s ability to generate cashflow, not the borrower’s financials.
This means that you don’t need to submit W2 forms, pay stubs, or worry about your debt-to-income ratio.
Instead, debt-service coverage ratio (DSCR) is the key metric lenders use when evaluating loan applications. A property’s DSCR is calculated by dividing its net operating income (rent received from tenants) by its debt service (all expenses, including mortgage payments, taxes, insurance, etc.).
Here’s an example: Say a real estate investor wants to purchase a single-family home. The mortgage and associated expenses are $1,000 per month, and the investor believes they can lease out the property for $1,200 per month. In this scenario, the property would have a DSCR of 1.2. It can service its debt obligations and still have some funds for vacancies and unexpected costs.
Alternatively, a DSCR of 1.0 indicates that the rental income is just enough to cover the property’s debt obligations.
A DSCR below 1.0, also known as a negative DSCR, means the property's cashflow isn't enough to settle the mortgage and associated expenses. However, as we discuss below, this doesn’t necessarily prevent you from qualifying for a DSCR loan.
We’ve been processing DSCR loans for over a decade, and below, we discuss the five key factors we consider when assessing an applicant’s eligibility.
If you’d like to see what interest rates you can qualify for and what your monthly payments may look like, you can use our DSCR calculator to get an instant quote.
Ideally, borrowers should aim for a DSCR of 1.0 or more, as this shows lenders the property can settle its loan payments.
However, with interest rates rising over the last two years, many lenders (including Constitution Lending) have lowered their minimum DSCR to 0.75. So, even if your property only generates enough income to pay 75% of its monthly expenses, you can still qualify for a DSCR loan.
Naturally, the higher your property’s DSCR, the less risk it poses to lenders, which allows you to qualify for better interest rates and receive a higher loan-to-value percentage (LTV).
To achieve a good DSCR on a property, borrowers need a larger downpayment compared to that of regular 30-year mortgages.
DSCR lenders normally provide borrowers with a loan-to-value percentage of 75% to 80%. So, if you’re purchasing a property for $1 million, for example, lenders will give you around $750,000 to $800,000, and you have to provide the remaining funds.
Alternatively, if you already own a property and want to do a cash-out refinance, DSCR lenders are willing to offer a loan for 75% to 80% of your property’s value, with the remaining 20% to 25% equity acting as collateral.
Although lenders primarily look at a property’s ability to service its debt, the creditworthiness of the borrower is still important. Lenders want to ensure that borrowers have good financial habits and a history of paying their loans on time.
Because of this, many DSCR lenders have high credit score requirements, usually mandating a minimum credit score of 700.
In addition to determining borrowers’ creditworthiness, FICO scores also help lenders shape the terms and rates of a DSCR loan. Borrowers with a good credit history typically qualify for lower interest rates and higher LTV loans.
However, unlike many DSCR lenders, Constitution Lending has financing options for borrowers with subpar credit. We can issue loans to borrowers with a FICO score as low as 660.
DSCR loans are only for real estate investments, so you can’t use them to purchase a primary residence.
Some lenders may also place restrictions on the type of rental property you can purchase, limiting you to properties with less than four units. This can be a problem for investors looking to finance larger properties, which is why Constitution Lending has more flexible loan options.
We provide loans for single-family properties, two to four-unit multi-family properties, and five to eight-unit condos.
However, we can’t offer DSCR loans for commercial, industrial, or mixed-use properties. A property should solely contain residential units in order to qualify for a DSCR loan. In addition, we can’t finance the purchase of Airbnb properties and other short-term rentals.
Note: Most lenders can only give DSCR loans for properties located in urban and suburban areas. So, if your single-family home is the only property within the next two miles, for example, it would be considered rural, and it’s unlikely you’ll qualify for a DSCR mortgage.
Constitution Lending offers loans ranging from $150,000 to $3,000,000, which is usually enough to purchase residential property in most US cities.
However, if you’re purchasing a studio apartment for example that costs less than $150,000, or a residence in a very expensive area, then DSCR loans may not be a good option for you.
DSCR lenders don’t consider borrowers' debt-to-income ratios. This means that you can take out unlimited DSCR loans as long as you have a downpayment of 20% to 25% and your properties meet the minimum DSCR requirement of 0.75.
We’ve been a DSCR lender for over 10 years, and during this time, we identified two problems with the industry:
To help you close loans quickly and avoid lenders who don’t actually have a say in whether your loan goes through or not, we recommend watching out for these factors when choosing a DSCR lender.
The first factor you should consider is the speed at which a lender gives you a term sheet. In our experience, if a lender takes too long to give you a term sheet, it’s unlikely things will speed up when you get to closing.
With Constitution Lending, we have an online calculator that gives you an accurate quote within seconds; you don’t have to wait for a loan officer to get back to you. If you’re happy with one of our quotes, you can click on it, and we’ll send you a term sheet within 24 hours.
We can achieve such fast loan approval times because we’re a direct lender, meaning we’re the ones funding your loan. We don’t have to meet with a third-party lender before giving you a quote.
All you have to do is enter a couple of details into our calculator, such as:
From here, our calculator generates a quote that looks something like this:
You can adjust your property's purchase price, LTV, and monthly rental income to see how they affect interest rates and DSCR.
As we mentioned above, you can select the quote that you like best, and we'll send you a term sheet within 24 hours.
Once approved, you can submit the required paperwork — such as proof of insurance, entity documents, credit report, and bank statements — through our documents portal.
From there, we'll send an appraiser to perform a detailed analysis of the property. As soon as the appraiser has determined its value, and you've submitted all the required documentation, we’ll send you the finalized loan terms and transfer the funds into your account.
This entire process takes around one week.
Another factor to consider is whether the lender you’re working with is a direct lender. In other words, are they funding the loan, or are they just originating the loan and connecting you to the actual lender?
Going with a direct lender ensures you’re talking to the person making underwriting decisions, not a loan originator who has to consult a third-party lender.
Why is this important? We often see loans fall through because originators sell loans to borrowers, but they aren’t actually funding the loan themselves, so they can’t make underwriting decisions. Then, after weeks of underwriting, the borrower learns of certain requirements or stipulations that they initially weren’t informed about, leaving them unqualified for the loan.
So, to ensure you don’t encounter unnecessary issues during the final stages of your application process, we suggest going with a direct lender.
At Constitution Lending, you work directly with our loan officers who are decision-makers in the underwriting process from day one. This ensures that the information given to you at the beginning of the engagement is accurate and eliminates the risk that your loan falls through after weeks of underwriting.
We created Constitution Lending specifically for professional investors looking for fast, easy, and reliable hard money loans like DSCR loans, so making the process as smooth and reliable as possible has been part of our DNA from day one.
If you want to quickly finance the purchase of a property with a DSCR loan, use our online calculator to generate a quote, and we’ll provide you with a term sheet within 24 hours.
In order to qualify for a DSCR or debt-service coverage ratio loan, an investment property needs to have a DSCR of at least 0.75, meaning the rental income should cover 75% of the mortgage. In addition, DSCR lenders typically require a high credit score, usually 700 or more, as they want to ensure that borrowers have good financial habits. Finally, a borrower needs to have sufficient equity in the property, around 20% to 25%.
You can calculate DSCR by dividing a property's net operating income (NOI), which is the rental income, by the debt service, which is the monthly loan repayment and other operating expenses like insurance and taxes.
The main benefit of a fixed-rate DSCR loan is that unlike a mortgage loan, borrowers don't have to submit proof of personal income or tax returns or worry about having a high debt-to-income ratio. This is because DSCR lenders don't look at the borrower’s financials but rather at the property's income potential.
DSCR lenders don't limit the number of property loans you can have at once. The main consideration is that a property can generate enough rental income to settle a portion of its debt service. So, as long as a borrower has a 20% to 25% downpayment and their property meets the minimum DSCR requirement, they can take out as many DSCR loans as they like.
The problem with DSCR loans is that they require a large downpayment, usually around 20% to 25%. This makes them an impractical option for real estate investors who don't have a lot of upfront capital. Additionally, DSCR loans have less consumer protection than conventional loans, so borrowers need to pay prepayment penalties if they’re settling their loan early.
A DSCR of 1.25 means that a property's net operating income is 1.25 times greater than its debt obligations. In other words, the property can generate enough income to settle all its monthly payments with a buffer of 25%. This is considered a good DSCR ratio because it tells lenders that the property has enough cash to cushion unexpected expenses and market fluctuations.
| Qualification | Requirement |
|---|---|
| Minimum and maximum loan amount | $150,000 to $3,000,000 |
| Type of property | Non-owner occupied single-family, multi-family, and 5-8 unit properties |