Debt service coverage ratio (DSCR) loans are a popular non-qualified mortgage loan type used by real estate investors.
This type of loan was once an essential part of an investor’s process, providing flexibility and the perfect alternative to loans that required borrowers to mainly qualify based on income and other factors.
However, the industry is changing. Rising federal interest rates are affecting a lender’s ability to deliver the type of flexibility investors need.
If you are an investor who is being affected by changes to this loan type, you, fortunately, have other options.
Let’s dig into how DSCR loans work, and how to find an alternative source of lending from a reputable hard money lender.
What’s your loan scenario?
What are DSCR loans?
DSCR loans allow investors to qualify based on a property’s cash flow, rather than verifying their income based on tax returns or pay stubs.
This is helpful because investors often have trouble proving their true income based on these types of income documentation.
They frequently write off expenses on their taxes, and simply presenting their income generally does not provide an accurate representation of their earnings and what they can afford.
How DSCR is calculated
DSCR loans are based on a ratio of a property’s annual net operating income and debt obligations. This allows lenders to determine how much of a loan the investor can support with their income.
Lenders allow different DSCRs, from 0.75 on the lower end to 1.0 and above. Anything below 1.0 has the potential for negative cash flow, but some lenders still will allow it if the borrower is planning to make improvements.
Lenders make property income forecasts in various ways, from appraisals to online market research.
Why do investors get DSCR loans?
DSCR loans are considered an essential loan type for investors because they’re designed with an investor’s unique situation in mind.
This means the focus is simply on the property’s potential for profit, with no required income verification or employment verification.
They’re also considered to be quicker to get than other loan types and allow lower down payment amounts.
DSCR loans and LTV requirements
However, these requirements have shifted since the Federal Reserve has increased the federal funds rate, with several more rate hikes planned this year.
DSCR loans once could deliver high loan-to-value (LTV) ratio loans, which allowed for lower down payment amounts.
Now, new investors may be required to pay a 30 percent or higher down payment, while seasoned investors may be allowed 20 percent or 25 percent.
With rising interest rates investors are now seeing DSCR lenders pull back from their aggressive lending criteria and now may require borrowers to come in with 40-50% equity or down.
Rental rates simply cannot increase at the pace interest rates have increased in the last few months so debt coverage /DSCR often falls short of providing the leverage needed by borrowers.
Plus, the DSCR ratio and LTV ratio that a borrower is allowed is based on their credit score, which generally must be very good.
DSCR loan alternatives
Now that a once reliable solution to an investor’s funding process may not be as flexible or feasible, where else can they turn?
There’s another flexible lending option for investors in the form of hard money loans.
With hard money loans, private investors fund deals based on the value of your assets, rather than strict requirements other lenders must use.
This results in a more flexible loan agreement that is mutually beneficial for both the lender and the borrower.
What are the requirements for a hard money loan?
To qualify for a hard money loan, the lender will simply want to know your situation, plan, and exit strategy in the form of an executive summary.
Since asset-based deals mean that the property itself is used as collateral, requirements and the required documentation adjust to match your unique scenario.
This adaptability allows for speed, simplicity, and financing that meets your needs, including receiving funding in as little as seven days.
How to get a hard money loan as an investor
Choosing a hard money lender as an investor shouldn’t be taken lightly, as not all lenders are the same.
Marquee Funding Group is the ethical standard of the hard money loan industry.
We provide the speed and flexibility that we understand investors must have in order to keep their deals moving efficiently.
But above all else, we seek to build long-lasting relationships with our customers for years of deals to come.
Marquee Funding Group has flexible loan options for investors
If you’re an investor and you find that you are no longer qualified for the DSCR loans you once relied on, the Marquee team can help you.
Hard money loan rates are often higher than other loan types, but many real estate investors prefer the quick cash flow of a hard money loan over the lengthy approval process for a lower rate.
Because we are able to focus on the merits of the deal above all else, including credit score or other requirements, we are able to offer instant approvals and funding in as fast as seven days.
Marquee Funding Group offers the following loan options:
- Owner-occupied and non-owner-occupied loans for both consumer and business purposes
- Construction, ground-up, fix-and-flip, or fix-and-occupy loans
- Commercial and industrial loans
- Short-term and long-term loan options
- Purchase money, rate-and-term refinance, and cash-out refinance
- Loans up to 70% LTV on any singular property or combination of properties
Our experienced investors will quickly review your situation and reach out to discuss the next steps.
Still have questions about the hard money loan process? We’d be more than happy to talk.