Our guide details how you can purchase investment properties without submitting income verification, tax returns, or any documents that larger banks usually ask for.
There are typically two problems with using conventional mortgages to purchase investment properties.
This is why we recommend using DSCR (Debt Service Coverage Ratio) loans. Instead of being underwritten on a borrower’s finances, such as debt-to-income ratio (DTI), income level, and tax returns, DSCR loans are underwritten on the investment property’s ability to settle its monthly payments. This means that:
To help real estate investors grow their portfolios, we’ve compiled this guide on using DSCR loans to purchase investment properties. We also discuss what you need to look for in a DSCR lender to ensure you can close quickly and compete with cash buyers.
You can use our instant loan pricer to get a loan quote and preapproval letter.
As mentioned above, the primary factor lenders consider when underwriting your DSCR loan is the property’s DSCR, which is calculated by dividing its rental income by its expenses.
For example, if a property generates $1,300 in monthly cash flow and its debt obligations (mortgage payments, taxes, insurance, etc.) total $1,000 per month, the property would have a DSCR of 1.3.
The higher a property’s DSCR, the easier it is to qualify and the lower interest rates you’ll receive.
However, you can still qualify for DSCR loans with a ratio below 1.00. Many lenders, including Constitution Lending, can issue loans as long as a property has a DSCR of 0.75.
Read more: DSCR Loan Requirements: 5 Key Factors Lenders Consider
In our experience, purchasing an investment property with a DSCR loan typically involves four steps:
Before approaching a lender to apply for a loan, run rough calculations to ensure the property you want to buy meets the 0.75 minimum DSCR. You can do this by:
You can also use our loan pricer to receive a more accurate DSCR figure. Our pricer automatically calculates a property’s DSCR and monthly expenses based on its asking price and estimated rental income.
In addition to ensuring a property can generate a DSCR higher than 0.75, you should check that your credit score is above 660. Lenders want to know that you’re a responsible borrower with a track record of settling your debts on time, so the higher your credit score, the easier it is to qualify.
The final box to tick is meeting the 20% to 25% down payment requirement. Most DSCR lenders will lend you a maximum of 75% to 80% of the property’s asking price, so you have to provide the remaining funds.
Many DSCR lenders require you to fill out an application form on their website, wait for a loan officer to contact you, and speak with them on the phone for an hour before they can determine whether you qualify.
We recommend avoiding lenders like these because this lengthy process can make it difficult to close quickly.
In contrast, with Constitution Lending, for example, you don’t have to fill out a form on our website and wait for someone to phone you. Instead, we have a loan pricer where you can generate an instant quote and see what interest rates and loan terms you qualify for.
We then present you with three loan options. If you’d like to apply for one of them, click on it, and we’ll send you a pre-approval letter and term sheet immediately.
By speeding up these initial steps, we can begin underwriting sooner than most DSCR lenders, leading to faster closing times.
Before closing the loan, the final step is submitting all the necessary paperwork for the lender to begin underwriting. With traditional mortgage loans, this is where you’d submit pay stubs, tax returns, proof of employment, and other personal financial documents.
However, because DSCR loans aren’t underwritten based on your personal finances, these documents aren’t required. Instead, the only documents you need to submit are proof of mortgage insurance, entity documents, a credit report, and bank statements (to show cash reserves).
Once you’ve submitted your documents and the lender has underwritten your application and given you the final green light, the next step is scheduling the loan closing. At this stage, you transfer the down payment into the title company’s account, sign all necessary paperwork, such as the deed of trust and closing disclosure, and finalize the loan.
We recommend considering the following factors when looking for a DSCR lender:
Before starting Constitution Lending, we were investing in real estate ourselves, and a common problem we encountered was that lenders would initially approve our loan application but then reject it right before we were about to close.
We soon realized that this was happening because we were partnering with brokers rather than direct lenders.
Brokers are essentially individuals connecting homebuyers with lenders. The problem with this is that they often didn’t understand the lender’s requirements. So, when we applied for a loan, these brokers would have to ask the lender to begin underwriting to find out if we qualified. Then, we’d wait a week or two, only to learn that our application had been rejected.
Partnering with a direct lender solves this problem because you communicate with the people in charge of funding your loan. They establish their own qualification criteria and understand what requirements a borrower must meet to qualify. This means they can give you a clear answer regarding your eligibility immediately after you've submitted documents. They don't have to contact a third-party lender and ask them to begin underwriting before giving you the green light.
At Constitution Lending, we are direct lenders who finance your loans with our own capital; you aren’t dealing with brokers sourcing your financing from third-party lenders.
We create our own lending requirements and deeply understand them, meaning we can get back to you with approval after you’ve submitted documents through our portal.
If we see that you’re unlikely to qualify, perhaps the property’s DSCR is too low, we can inform you of this so you can focus on finding a property with higher DSCR instead of waiting a week or two only to get rejected.
Read more: 5 Best DSCR Lenders Comparison
Another factor you should consider is a lender’s ability to close loans quickly.
A reliable way to tell how fast a lender can close is by looking at the speed at which they issue term sheets and pre-approval letters. If a lender takes multiple weeks to approve your loan and send you a term sheet, it’s likely that closing will also take longer.
At Constitution Lending, we can issue loan approval and term sheets immediately after you’ve generated a quote using our loan pricer.
Then, we send over access to our documents portal where you can submit all the necessary paperwork such as bank statements, entity documents, and proof of insurance.
Once you’ve submitted all the documents, we give you the final green light, begin underwriting, and close the loan within 14 to 30 days. In scenarios where borrowers need to purchase or refinance an investment property quickly, we can close within 7 days.
DSCR loans are a great alternative to conventional loans if you have a high debt-to-income ratio and want to grow your investment portfolio without the higher interest rates charged by larger banks.
Unlike home mortgage lenders, DSCR lenders don’t consider your personal finances but instead at a property’s cash flow potential. This means you can qualify for unlimited DSCR financing options as long as a property has a DSCR of 0.75 or higher and you have a 20% to 25% down payment.
Use our loan pricer to see what interest rates you’re eligible for and get an instant quote.
While investment property loans like DSCR loans aren’t underwritten based on homeowners’ financials but instead on the rental property’s cash flow, they are harder to qualify for because you need a down payment of at least 20%.
When applying for real estate investment loans, borrowers typically need a credit score of 660 or higher. Some lenders may even require a minimum credit score of 700.
Investment property mortgage rates are currently between 7.00% and 8.50%. This figure depends on factors such as whether you’re purchasing the property or doing a cash-out refinance, whether the loan is fixed-rate or adjustable-rate, the LTV you’re applying for, and your credit score.
DSCR loans are one of the best loan programs for non-owner-occupied properties because they are underwritten based on the property’s cash flow, not the borrower’s financials. This means borrowers aren’t limited by their debt-to-income ratios. However, depending on your investment strategy, FHA loans, VA loans, home equity loans, HELOCs, and hard money loans are also good options.
DSCR loans are a great way to purchase investment property without income verification. Instead of being underwritten on the borrower's financials, DSCR lenders' main consideration is whether a property can pay its debt obligations using its rental income. So, even if you don't earn enough to qualify for a traditional mortgage, you can still be eligible for a DSCR loan.
Most DSCR lenders are typically willing to lend up to 75% to 80% of the property's value (plus closing costs), meaning you need an upfront down payment of at least 20% to 25%.
| 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 |