DSCR Loan Down Payment – A Short Guide

In the past 3 years, DSCR loans have become increasingly popular amongst both beginners and experienced real estate investors. Since then, the amount of money issued by DSCR loan lenders in the US has increased from $4,2 billion to more than $16,5 billion, and it doesn’t look like it will stop there. Apart from being extremely popular, DSCR loans also come with a unique set of requirements that are different from those of regular mortgage loans. These include specific requirements for a DSCR loan down payment.

But, before we start talking about DSCR loan down payments, let’s first quickly review what DSCR loans are.

What Is a DSCR Loan?

DSCR loans are just one of numerous non-qualified mortgage loans (non-QM), aimed at providing financing to real estate investors. The reason DSCR loans are classified as non-QM loans is because they do not fulfill all the requirements set by the Consumer Financial Protection Bureau (or CFPB). These standards are there to ensure (or to increase the likelihood) of borrowers repaying their debt. Some key things to know about DSCR loans include:

• DSCR loans are mostly offered by private lenders; 
• Interest rates for DSCR loans are a bit higher;
• The terms and conditions of each loan can greatly vary between lenders and each particular case;
• DSCR loans are investor-only loans which means that they are exclusively for investing in rental properties and not for buying a primary residence ;
• The main thing that the lenders of DSCR loans will be focused on is a property’s DSCR score (to calculate DSCR divide Net Operating Income with the Debt Service);

Another important thing that we should mention is that DSCR loans are a bit riskier for lenders, because:

• They are not regulated by the government;
• Borrowers don’t need to have a high credit score or an extensive job history;
• They require far less paperwork and are much easier to get than other mortgage loans.

Now, taking into account all of the above and in order to protect themselves from risk, lenders of DSCR loans have almost unanimously decided to — require a higher down payment. But, by how much and what factors can affect the down payment percentage? Let’s review. 

What Is the DSCR Loan Down Payment?

Unlike qualified mortgage loans that are offered by banks and are government-regulated, DSCR loans are usually offered by private lenders. The main benefit of this is that more investors will be eligible to get this type of loan, but at a certain cost. 

Because non-QM loans are often a bit riskier than regular mortgage loans, DSCR loan lenders will usually request a higher down payment. On average, the DSCR loan down payment will be around 20-25% of the full loan amount. 

Are DSCR Loan Down Payments the Same for Every Lender?

DSCR loans are mostly offered by private lenders (not by banks). This means that the specific terms and requirements will vary between lenders and each specific situation. 

What Affects the DSCR Loan Down Payment?

The factors that can affect the DSCR loan down payment include:

• Net operating income (NOI) — When it comes to rental properties NOI is calculated by subtracting all of the expenses from the monthly rental income. Lower NOI will usually be accompanied by higher DSCR loan down payment requirements;
•  DSCR score — This score is calculated by dividing the NOI by the total Debt Service. The higher the number, the more likely the lenders will be to offer you a better deal (Or in this case, require a lower down payment);
• Credit score — Although not every lender takes into account the borrower’s credit score, some most certainly will. The higher your credit score is, the better terms lenders will be willing to offer, including a lower down payment percentage.

Apart from the above, another thing that can influence the DSCR down payment requirement will be specific market conditions. If the real estate market is stable or is experiencing steady growth, the lenders will be more willing to accept lower down payments. 

Who Can Benefit From DSCR Loans?

DSCR loans are great for both beginners to the real estate game and experienced investors looking to grow their portfolios. They are much easier to get than regular mortgage loans and require much less paperwork. Also, they are great for anyone who deducts property expenses from their tax returns.  

DSCR loans are a great option for investors looking to purchase a rental property (a property that generates income through rent). The types of rental properties that you can buy with a DSCR loan include:

• Single-family homes;
• Multi-family homes;
• Apartment buildings;
• Commercial buildings or property;
• Condominiums;

Is There an Advantage to Putting Down a Larger Down Payment?

The initial amount of money you’re able to invest (e.g. the down payment) can impact the exact loan terms. When it comes to DSCR loans, putting down a larger down payment could allow you to:

• Purchase a more expensive property;
• Convince a lender to accept a lower interest rate;
• Lower the amount of money needed to cover the monthly debt repayment.

Another thing that’s important to mention is that, the larger the down payment you are willing to put in the less risk it will be for lenders. If you have more of your own money invested in the property, the lenders will be more likely to offer you better interest rates and other terms that can impact the loan agreement.

How to Calculate DSCR Loan Down Payment?

To calculate the exact amount of money a DSCR loan down payment will be, all you have to do is use a formula for calculating percentages. If you’re not familiar with that, try following our formula to determine your DSCR loan down payment. 

For the purpose of our example, let’s assume that the property you’re looking to buy is worth $250,000 and that the down payment is 20% of that amount. To calculate how much exactly is those 20% worth in dollars, you have to:

 250,000 x 20 / 100 = 50,000

So, for a property worth $250,000 that comes with a down payment of 20%, you’ll need to prepare $50,000. 

If you need help calculating DSCR or just want to learn how to do it for yourself, check out our free DSCR calculator.  

FAQ

Can I get a DSCR loan without down payment?

Technically the answer is yes. Because DSCR loans are not regulated, the exact terms and conditions of each deal will be determined by a specific lender, and this includes the amount of money they’ll request for a down payment.   If the numbers are good, it is possible to find lenders that will not request a down payment.

Is it more difficult to get DSCR loans than conventional loans?

No. In fact, one of the main pros of DSCR loans is that they are much easier to qualify for and get when compared to other types of mortgage loans. To qualify for a DSCR loan, you won’t need to share your financial information, have W-2 forms, or show the lender your job history. The main thing lenders will be interested in is the DSCR score, which can be boiled down to the amount of money a property can generate each month (basically cash flow).