DSCR Loan Interest Rates: The In-Depth Analysis
DSCR loans are a type of mortgage loan where the Debt Service Coverage Ratio (DSCR) is used as a main metric to evaluate and approve them. These types of loans are solely for investors and are not for people looking to finance their primary residence. And, just like with other types of interest, the DSCR loan interest rates can be filed as expenses on tax forms (meaning that the amount of money spent on paying off the interest is actually tax-exempt).
To calculate DSCR, lenders usually use the following formula:
DSCR = NOI / Debt Service
Current DSCR Loan Rates for 2024 are:
| Credit Score | ≥750 | ≥720 | ≥700 | ≥680 | ≥650 | ≥620 | ≥600 | |
| ≤ 50% | 7,3% | 7,5% | 7,6% | 7,8% | 7,9% | 8% | 8,2% | |
| ≤ 40% | 7,4% | 7,6% | 7,7% | 7,9% | 8% | 8,2% | 8,4% | |
| ≤ 35% | 7,5% | 7,8% | 7,9% | 8% | 8,1% | 8,3% | 8,5% | |
| ≤ 30% | 7,7% | 7,9% | 8% | 8,1% | 8,3% | 8,5% | 8,8% | |
| ≤ 25% | 8% | 8,1% | 8,3% | 8,5% | 8,6% | 8,8% | 9,1% | |
| ≤ 20% | 8,4% | 8,7% | 8,8% | 8,9% | 9% | 9,1% | 9,3% | |
DSCR loan interest rates can be based on the down payment and the borrower’s credit score, but are ultimately decided by the lender. The above is an example of what to expect from a DSCR loan lender, rather than the actual interest rates.
How to Calculate Interest Rates for DSCR Loan?
To calculate DSCR loan interest rates all you have to do is follow the formula:
DSCR Loan Interest Rate = 5 Year US Treasury + Borrower Credit Spread
The 5-Year US Treasury is an index that is equal to the yield from investing in the US government bonds that have a 5-year maturity rate. This index fluctuates and can be affected by interest rates, inflation, or economic growth. Currently, the 5-Year US Treasury is set at 4,712%.
The Borrower Credit Spread is the additional interest rate that DSCR loan lenders charge borrowers. It’s usually between 3.30% to 4.5% and it depends on the following factors:
- Borrowers’ credit score (the minimum is usually 620) ;
- Loan-to-value ratio (LTV);
- The exact type of property (commercial or apartment building, single or multi-family unit, etc.);
- Borrower’s experience (the less experience, the more likely the lenders will be to demand a higher Borrower Credit Spread);
- Prepayment penalty (additional fee in the case a borrower pays off all or part of the loan early);
- Specific lender (different lenders will have different requirements);
For the purpose of this example, let’s say that the Borrower Credit Spread equals 4,1%. In that case, to calculate the DSCR loan interest rates you’ll have to:
DSCR Loan Interest Rate = 5 Year US Treasury + Borrower Credit Spread
DSCR Loan Interest Rate = 4,712% + 4,1% = 8,812%
[crevc-calculator downpayment=20 price=200000 rate=7 term=30 noi=21600]
Main Types of DSCR Loan Interest Rates
There are 3 different types of DSCR loan interest rates that you need to take into account when considering the pros and cons of DSCR loans. They are as follows:
1. Fixed DSCR Loan Interest Rates
The main component of fixed DSCR loan interest rates is that they are constant. Meaning, that the original rate won’t change (will be the same) for the entire duration of the loan. This lowers the risk for the borrowers as they can not be affected by an unexpected increase in rates (which can affect the amount they would need to cover their monthly payments). And, because of that the monthly payments will also remain the same for the full length of the loan.
2. Adjustable DSCR Loan Interest Rates
Adjustable DSCR loan rates can vary and are usually dependent on the current market conditions. The rates are evaluated once or twice per year and are then adjusted accordingly.
Whether the rates go up or down can be based on different reasons and it will mostly depend on the exact loan terms that both lender and borrower agree on. For example, if the lender chooses to tie the DSCR loan interest rate to the 5 Year US Treasury index, then:
- The DSCR interest rate will go up when the treasury index goes up.
- The DSCR interest rate will go down when the treasury index goes down.
The monthly loan payments are directly affected by adjustable interest rates. When they go down, the payments will be lowered, and when they go up, the opposite will be the case.
3. Hybrid DSCR Loan Interest Rates
A hybrid DSCR interest rate is a mixture of both fixed and adjustable rates. Most commonly, the interest rate will start as a fixed one, and will not change for a certain time period (e.g. 5-10 years). After the initial period is over, the interest rate will then become an adjustable one and will be subject to various market conditions (determined by the terms of the DSCR loan agreement).
6 Most Common Factors That Affect DSCR Loans Interest Rates
As DSCR loans are not government-regulated, which means that the final terms of the loan will always depend on the specific lender. But, there are some factors that most lenders look for before making their final decision on an offer. They are:
1. Credit Score
Individual credit scores can play a significant role in determining DSCR interest rates. Lenders will look at borrowers’ credit history and will use it as a metric to determine fiscal trustworthiness and the capability of a borrower to repay the loan in full. The higher the credit score, the more favorable terms lenders will be willing to offer.
A table that gives an example of how a credit score can impact the DSCR loan interest rates:
| Credit Score | Interest Rate |
| 760+ | +0,0% |
| 740 – 759 | +0,05% |
| 720 – 739 | +0,1% |
| 700 – 719 | +0,15% |
| 680 – 699 | +0,25% |
| 660 – 679 | +0,50% |
| 640 – 659 | +0,75% |
| 620 – 639 | +1,0% |
2. Loan Amount
DSCR interest rates can also be impacted by the loan amount a specific borrower is looking for in order to finance a particular rental property. Most commonly, the lenders will issue higher rates for lower sums of money. For example:
| Loan Amount | Interest Rate |
| $200,000+ | +0,0% |
| $175,000 – $200,000 | +0,1% |
| $150,000 – $175,000 | +0,2% |
| $125,000– $150,000 | +0,3% |
| $100,000 – $125,000 | +0,4% |
| $75,000 – $100,000 | +0,5% |
3. Prepayment Penalty
A prepayment penalty is a type of fee imposed on borrowers only in the case that they repay the loan early (by selling or refinancing). This fee is usually equal to a small percentage of the amount that the borrower still needs to repay. The most common types of prepayment penalties are:
- 5-4-3-2-1 prepayment penalty — The lender will charge a 5% fee for the outstanding loan to the borrower if the loan is fully paid off in one year, 4% if it is repaid in 2 years, 3% for 3, and so on.
- 3-2-1 prepayment penalty — The lender will charge 3% of the outstanding loan to the borrower if the loan is paid in full in one year, 2% for 2 years, and so on.
- 3-0-0 prepayment penalty — The lender will charge 3% of the outstanding loan to the borrower, but only if the loan is paid off in the first year.
The duration of the prepayment penalty can have an effect on the interest rate of DSCR loans. For example:
| Prepayment Penalty | Interest Rate |
| 5-4-3-2-1 | +0,0% |
| 3-2-1 | +0,3% |
| 3-0-0 | +0,5% |
4. DSCR Ratio
The exact DSCR ratio can have a big impact on the loan interest rates. The higher the ratio is for a specific property, the more cashflow the borrower will have to operate with. And, the more cash the borrower has, the less risk for lenders will be. For those reasons, lenders will usually offer better DSCR loan interest rates for properties with a higher DSCR ratio.
5. The Exact Type of Property
Some lenders will be more inclined to offer better interest rates for certain types of properties. For example, the lenders might increase DSCR loan interest rates if the borrower wants to buy a commercial building, as they tend to be more risky and are directly tied to the job market and economy. On the other hand, some lenders may lower their interest rates if the borrower wants to finance a single-family residential unit (usually less risky for lenders).
6. The Duration of the Loan
The DSCR loan duration can have an impact on the interest rates. Usually, the longer the loan term is the higher the interest rate will be. So, for example, if a borrower is looking for a loan period of 30 years, the interest rates for that amount of time will be higher, when compared to the 20-year loan period.
How to Lower a DSCR Loan Interest Rate?
There are different things that you can do to ensure you’ll get the best deal and the lowest DSCR interest rates from a specific lender.
- Improve Your Credit Score — The higher your credit score is, the more likely the lenders will be to give you a DSCR loan with lower interest rates.
- Put down a larger down payment — The bigger the sum (or the percentage of property value) you offer as a down payment, the lower your interest rates will be. For example, if you offer 40% of the property’s value as a down payment, your interest rate will be lower than if you offer 20%.
- Meet with different lenders — DSCR loans are not regulated by the federal government. This means that the specific loan terms can vary between different lenders. To ensure you get the lowest interest rates, you should always shop around and get in touch with as many lenders as you can.
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