When it comes to real estate investing, Debt Service Coverage Ratio (DSCR) loans are a popular financing option—especially for investors looking to qualify based on a property’s income rather than personal income. However, not all DSCR loans are created equal. The terms you receive—such as interest rate, loan-to-value ratio (LTV), and required reserves—can vary significantly depending on several key factors.
Whether you’re a seasoned investor or just starting out, here are the most important elements that can help you secure better terms on a DSCR loan:
1. Strong Credit Score
While DSCR loans primarily focus on property income, your personal credit score still plays a role in how favorable your loan terms will be. Most lenders have a minimum score requirement (often around 660), but the higher your credit score, the better your interest rate and terms.
Why it matters: A higher score signals to lenders that you're responsible with debt and less likely to default.
Tip: Aim for a score above 700 to qualify for premium terms, and address any credit report issues before applying.
2. Solid Payment History on Existing Mortgages
Lenders review your payment history on your primary residence and other investment properties to evaluate your reliability. Even if your DSCR loan doesn’t use traditional income documentation, a clean mortgage payment history shows you manage obligations well.
Why it matters: Missed or late payments are red flags that can lead to higher rates or loan denial.
Tip: Keep all housing-related accounts current and avoid new delinquencies in the months leading up to your loan application.
3. Experience as a Real Estate Investor
Having a track record of successful real estate investments can strengthen your loan application. You are considered experienced if you have owned at least one investment property for over 12 months. Lenders see experienced investors as lower-risk borrowers, often rewarding them with better terms.
Why it matters: Experience suggests you know how to manage property, tenants, and finances—reducing the risk of default.
Tip: Even one or two completed projects can improve your standing. Be ready to share details about your portfolio.
4. For Refinances: Property Seasoning (12+ Months of Ownership)
If you’ve owned the property you are refinancing for more than a year, it’s considered “seasoned.” This proves stability and allows lenders to verify historical income and performance more accurately.
Why it matters: Lenders prefer properties with proven cash flow and operational consistency.
Tip: If your property is newly acquired, be prepared for slightly more conservative terms or provide documentation that supports its income potential.
5. Willingness to Accept a Prepayment Penalty
While no one likes penalties, accepting a prepayment penalty (typically for the first 3–5 years) can lead to better loan terms. Lenders like knowing the loan won’t be paid off early, especially in the case of refinances.
Why it matters: It provides lenders with revenue predictability, reducing their risk.
Tip: Evaluate your investment timeline. If you plan to hold the property long-term, agreeing to a penalty may be a smart tradeoff for a lower rate.
6. Positive Property Cash Flow
The core metric in a DSCR loan is the debt service coverage ratio—calculated by dividing the property’s net operating income (NOI) by the total debt service. A DSCR of 1.00 means the property breaks even. Most lenders want at least 1.1–1.25, but higher ratios can unlock better terms.
Why it matters: Strong cash flow means the property more than covers its debt, reducing lender risk.
Tip: Increase rents (if justified by the market), reduce expenses, and keep vacancy low to improve the property’s DSCR.
7. Occupancy: Tenant in Place vs. Vacant Property
Lenders strongly prefer properties with tenants already in place. Vacant properties require assumptions about future rent, which adds uncertainty.
Why it matters: A leased, cash-flowing property shows immediate income, making underwriting simpler and terms more favorable.
Tip: If the property is vacant, consider delaying your loan application until a lease is signed and the tenant is in place.
Final Thoughts
DSCR loans offer real estate investors a flexible, income-focused path to financing—but the terms you receive depend heavily on your profile and the property’s performance. By boosting your credit, maintaining solid payment history, showcasing experience, and optimizing the property's income, you position yourself for success.
Every point mentioned above isn’t just about qualifying for the loan—it’s about reducing risk in the eyes of the lender. And the lower your perceived risk, the better the deal you’re likely to get.
Looking to optimize your DSCR loan application? We'd be happy to talk with you and find solutions tailored to your situation.
