Can You Do a 30-Year DSCR Loan: 3 Key Qualifications?

Acquiring a 30-year fixed-rate DSCR loan can be a game-changer for real estate investors, but navigating the qualifying criteria and understanding how rental income impacts approval are critical to success. From common loan terms to the application process, having an in-depth understanding is essential.

In this article, we’ll delve into three key qualifications for securing a 30-year fixed-rate DSCR loan, along with other relevant aspects of this type of loan, ensuring you are equipped to make informed decisions for your investment property.

Can you get a 30-year DSCR loan?

A 30-year DSCR loan is a type of loan that allows borrowers to have a longer repayment period of 30 years while considering their ability to meet the debt obligations. The main benefit of a 30-year DSCR loan is that it offers lower monthly payments compared to shorter-term loans, making it more affordable for borrowers.

This longer repayment period allows borrowers to have more cash flow available for other purposes. However, there are risks associated with this type of loan. One risk is the potential for higher interest costs over the life of the loan due to the extended repayment period. There may be a higher risk of default if the borrower’s financial situation changes over the 30-year term.

What is a DSCR loan?

A DSCR is a type of loan commonly used in real estate financing. It measures the ability of a property’s net operating income to cover its debt obligations, including principal and interest payments. The DSCR is calculated by dividing the property’s net operating income by its total debt service.

This ratio provides lenders with an indication of the property’s cash flow and its ability to generate enough income to service the loan. A higher DSCR indicates a lower risk for lenders, as it shows that the property’s income is sufficient to cover its debt payments.

Lenders often require a minimum DSCR as a condition for approving a loan, ensuring a certain level of financial stability and reducing the risk of default for both borrowers and lenders in the real estate market.

3 Key qualifications for securing a 30-year fixed-rate DSCR loan

1. Demonstrated DSCR stability

To secure a 30-year fixed-rate DSCR loan, borrowers need to demonstrate a stable DSCR. This means providing evidence of consistent and sufficient net operating income to cover debt obligations. Lenders often have a minimum DSCR threshold, such as 1.25 or 1.30, to make sure the property generates enough income to make loan payments over the long term. To meet this qualification, borrowers should provide historical financial statements and projected cash flow analyses that demonstrate a stable and reliable income stream.

2. Strong creditworthiness

Securing a 30-year fixed-rate DSCR loan also requires strong creditworthiness. Lenders assess the borrower’s credit history, credit score, and overall financial health to determine their ability to repay the loan. A good credit score, typically above 680, along with a low debt-to-income ratio, is good to demonstrate financial responsibility. Borrowers should review their credit reports for accuracy and take steps to improve their creditworthiness if needed, such as paying off existing debts and resolving any outstanding issues.

3. Sufficient down payment and reserve funds

Lenders often require borrowers to have a significant down payment and reserve funds to secure a 30-year fixed-rate DSCR loan. The specific amounts vary depending on the lender’s requirements and the property being financed. Typically, borrowers may need to provide a down payment of 20% or more of the property’s purchase price. Lenders may require borrowers to maintain reserve funds as a safety net for unexpected expenses or changes in cash flow. These reserve funds are usually calculated as a percentage of the loan amount or a certain number of months’ worth of principal, interest, taxes, and insurance (PITI) payments.

What types of properties are eligible for DSCR loans?

  • Residential properties: DSCR loans are commonly available for various types of residential properties, including single-family homes, duplexes, triplexes, and multi-unit apartment buildings.
  • Commercial properties: DSCR loans are also applicable to different types of commercial properties, such as office buildings, retail spaces, industrial warehouses, and mixed-use properties.
  • Investment properties: DSCR loans can be used to finance investment properties, including rental properties and properties intended for resale or rental income generation.
  • Hospitality properties: Hotels, motels, resorts, and other hospitality properties may be eligible for DSCR loans, particularly when they have a stable income stream and meet the lender’s criteria.
  • Healthcare properties: Medical offices, clinics, assisted living facilities, and other healthcare-related properties may qualify for DSCR loans due to their potential for stable income generation.
  • Special purpose properties: Certain special purpose properties, such as self-storage facilities, car washes, and gas stations, may be considered for DSCR loans based on their income potential and market demand.
  • Mixed-use properties: Properties that combine residential and commercial elements, such as residential units above retail spaces, are often eligible for DSCR loans.
  • Vacant land: In some cases, vacant land intended for development or construction may qualify for DSCR loans. However, lenders may have specific criteria and requirements for land loans.

How does rental income impact DSCR loan approval?

Rental income positively impacts loan approval by increasing the property’s net operating income (NOI), which is the income after operating expenses. A higher rental income leads to a higher NOI, resulting in a stronger DSCR.

Lenders assess the DSCR to determine if the property generates enough income to cover the loan payments. A higher DSCR indicates lower risk for lenders and increases the likelihood of loan approval.

What are the common loan terms for DSCR loans?

  • Period of maturity: The period of maturity refers to the length of time over which the DSCR loan is repaid. Common loan terms for DSCR loans can vary, but they often range from 5 to 30 years, with 15 and 30-year terms being more common.
  • Interest rate: The interest rate is the cost of borrowing and determines the amount of interest paid on the loan. DSCR loans typically have a fixed interest rate, meaning it remains the same throughout the loan term. The interest rate can vary depending on factors such as market conditions, borrower’s creditworthiness, and the specific lender’s policies.
  • Principal amount: The principal amount of a DSCR loan refers to the total amount borrowed. It is based on the property’s appraised value or purchase price, and lenders often finance a percentage of this value. The exact principal amount granted depends on factors such as the borrower’s creditworthiness, the property’s cash flow, and the lender’s loan-to-value (LTV) ratio requirements.

What factors do lenders consider when determining loan length?

  • Property type and purpose: Lenders consider the type of property being financed and its intended purpose. Different property types may have varying levels of risk and market conditions, which can influence the loan length. For example, a residential property may have a different loan length compared to a commercial property.
  • Borrower’s financial profile: Lenders assess the borrower’s financial profile, including creditworthiness, income stability, and debt-to-income ratio. A borrower with a strong financial profile may have more flexibility in choosing a loan length, while a borrower with less stable finances may have limited options.
  • Cash flow and debt service coverage: Lenders evaluate the property’s cash flow and DSCR to assess its ability to generate sufficient income for loan repayment. A property with strong cash flow and a higher DSCR may be eligible for longer loan terms, allowing for lower monthly payments.
  • Market conditions: Lenders take into account prevailing market conditions, such as interest rates and economic trends. Higher interest rates may lead to shorter loan terms, whereas lower rates could allow for longer loan lengths. Economic stability and market demand also influence lenders’ decisions on loan length.
  • Property value and loan-to-value ratio: The value of the property being financed and the loan-to-value (LTV) ratio impact the loan length. Higher-value properties or lower LTV ratios may offer more favorable terms and potentially longer loan lengths.
  • Borrower’s preferences and financial goals: Lenders consider the borrower’s preferences and financial goals when determining the loan length. Some borrowers may prioritize a shorter-term loan to pay off the debt quickly, while others may prefer longer loan terms for lower monthly payments.

Do DSCR loans require personal income or tax returns?

While personal income and tax returns are commonly requested for traditional mortgage loans, DSCR loans focus more on the property’s income-generating potential. As a result, lenders may place less emphasis on personal income and tax returns. Instead, they often prioritize evaluating the property’s cash flow and net operating income (NOI) through documents such as rent rolls, operating statements, and lease agreements.

However, lenders may still request personal income and tax returns to assess the borrower’s overall financial stability and creditworthiness, especially in cases where the property’s income alone may not be sufficient to meet the loan requirements.

What is the range of loan amounts for a 30-year fixed-rate DSCR loan?

The minimum loan amount for a 30-year DSCR loan is typically influenced by the lender’s policy and their willingness to provide financing for smaller loan amounts. However, it is common to see minimum loan amounts in the range of $50,000 to $100,000.

On the other hand, the maximum loan amount for a 30-year DSCR loan is influenced by various factors such as the property’s appraised value or purchase price, the borrower’s creditworthiness, the lender’s loan-to-value (LTV) ratio requirements, and any specific restrictions or guidelines set by the lender.

In general, lenders may offer loan amounts up to a certain percentage of the property’s value, often ranging from 70% to 90% of the appraised value or purchase price.

Are there any alternative loan options to consider besides DSCR loans?

  • Conventional mortgage loans: Conventional mortgage loans are a common alternative to DSCR loans, especially for residential properties. These loans typically require a down payment and assess the borrower’s personal income and creditworthiness.
  • FHA loans: FHA loans are backed by the Federal Housing Administration and are designed to make homeownership more accessible. They often have more flexible qualification criteria, lower down payment requirements, and may be suitable for individuals with lower credit scores.
  • VA loans: VA loans are available to eligible veterans, active-duty service members, and their spouses. These loans are guaranteed by the Department of Veterans Affairs and offer benefits such as no down payment requirements and potentially lower interest rates.
  • USDA loans: USDA loans are offered by the United States Department of Agriculture and are designed to assist borrowers in rural areas. They provide low-interest financing options with no down payment requirements for eligible properties and borrowers.
  • Private money loans: Private money loans, also known as hard money loans, are provided by private individuals or organizations. These loans can be useful for borrowers who may not qualify for traditional financing due to credit issues or unique property circumstances. Private money loans often have higher interest rates and shorter terms.
  • Seller financing: In some cases, sellers may be willing to finance the purchase directly by offering seller financing. This allows the buyer to make payments directly to the seller over an agreed-upon period, providing an alternative financing option.

What is the application process for obtaining a 30-year fixed-rate DSCR loan?

  1. Preparation and research: Begin by gathering the necessary financial documents, such as property information, cash flow statements, rent rolls, and personal financial statements. Research various lenders to find those who specialize in DSCR loans and understand their specific requirements and loan terms.
  2. Loan application: Complete the loan application provided by the chosen lender. This includes providing personal and property information, as well as details about income and expenses related to the property.
  3. Document submission: Submit all required documents to the lender, which may include property appraisals, lease agreements, tax returns, bank statements, and other supporting financial documentation.
  4. Underwriting process: The lender will review the submitted documents and assess the property’s cash flow, DSCR, borrower’s creditworthiness, and other factors to determine loan eligibility. They may also conduct a property appraisal to assess its value.
  5. Loan approval: If the lender approves the loan application, they will issue a loan commitment letter outlining the terms and conditions of the loan, including the interest rate, loan amount, and closing requirements.
  6. Loan closing: Once the loan commitment is accepted by the borrower, the closing process begins. This involves signing the loan documents, paying any closing costs or fees, and transferring ownership of the property.
  7. Loan disbursement: After closing, the lender will disburse the loan funds. The borrower can use these funds to complete the purchase or refinance process.
  8. Repayment: The borrower is responsible for making regular monthly payments over the 30-year term of the loan, covering both principal and interest amounts.
Author: Alice