DSCR Loan No Down Payment: How to Buy Rental Properties With No Income Verification

How You Can Buy Rental Properties With DSCR Loan No Down Payment? If you are a real estate investor looking for a way to buy rental properties without having to show your income or make a large down payment, you might be interested in a DSCR loan. A DSCR loan is a type of mortgage that is based on the debt-service coverage ratio (DSCR) of the property, rather than the borrower’s income or credit score.

This means that you can qualify for a DSCR loan if the rental income from the property is enough to cover the monthly mortgage payment and other expenses, regardless of your personal income or debt situation. In this article, we will explain what a DSCR Loan No Down Payment is, how it works, and how you can buy rental properties with no down payment and no income verification using this financing option.

Table of Contents

What is a DSCR Loan?

A DSCR loan is a non-qualified mortgage (non-QM) loan that is designed for real estate investors who want to buy or refinance rental properties. Unlike a qualified mortgage (QM) loan, which has to meet certain standards set by the federal government, a non-QM loan has more flexible and lenient underwriting criteria. A DSCR loan is one of the most popular types of non-QM loans for investors, because it does not require any income verification or documentation from the borrower.

Instead, the lender evaluates the loan based on the DSCR of the property, which is the ratio of the net operating income (NOI) to the debt service (DS). The NOI is the rental income minus the operating expenses, such as taxes, insurance, maintenance, and vacancy. The DS is the monthly mortgage payment, including principal, interest, taxes, and insurance (PITI). The DSCR is calculated by dividing the NOI by the DS. For example, if a property has a NOI of $2,000 and a DS of $1,500, the DSCR is 1.33 ($2,000 / $1,500).

The DSCR indicates how well the property can generate enough cash flow to pay for the mortgage and other expenses. A higher DSCR means that the property has more cushion and less risk of default. A lower DSCR means that the property has less margin and more risk of default. Typically, lenders require a minimum DSCR of 1.0 or higher for a DSCR loan, meaning that the rental income should be equal to or greater than the mortgage payment. However, some lenders may accept a lower DSCR, depending on the loan-to-value (LTV) ratio, the property type, the market conditions, and the borrower’s credit score.

How Does a DSCR Loan Work?

DSCR Loan No Down Payment: A DSCR loan works similarly to a conventional loan, except that the lender does not verify or consider the borrower’s income or debt-to-income (DTI) ratio. Instead, the lender focuses on the property’s income potential and cash flow. To apply for a DSCR loan, you need to provide the following information and documents:

The property address and description
The purchase price or appraised value
The loan amount and LTV ratio
The rental income and expenses
The DSCR calculation
The borrower’s credit report and score
The borrower’s bank statements and reserves
The borrower’s identification and proof of ownership

The lender will then review your application and perform an appraisal of the property to verify its value and rental income. The lender will also check your credit history and score to determine your creditworthiness and interest rate. The lender will then approve or deny your loan request based on the DSCR and other factors. If approved, you will receive a loan commitment letter and a closing date. You will then sign the loan documents and pay the closing costs. The lender will then fund the loan and transfer the title to you.

How You Can Buy Rental Properties With DSCR Loan No Down Payment And No Income Verification

One of the main benefits of a DSCR Loan No Down Payment is that it allows you to buy rental properties with no down payment and no income verification. This can be a great advantage for investors who have limited cash or income, or who want to avoid the hassle and paperwork of traditional loans. However, not all DSCR loans offer zero down payment options. Most DSCR loans require a minimum down payment of 20% to 25% of the purchase price or appraised value, whichever is higher. This is higher than most QM loans, such as an FHA, VA, or USDA loan, which have minimum down payments ranging from 0% to 3.5%. However, there are some ways to buy rental properties with no down payment using a DSCR loan, such as:

Buying a property at 75% or below its after-repair value (ARV). If you find a property that needs some repairs or improvements, and you can buy it at a discounted price, you may be able to use a DSCR loan and finance the entire purchase price and rehab costs. For example, if you find a property that is worth $200,000 after repairs, and you can buy it for $150,000, you can use a DSCR loan and borrow $150,000, which is 75% of the ARV. This way, you can buy a rental property with no money down and increase its value and cash flow after repairs.
Using a seller financing or lease option. If you find a motivated seller who is willing to finance the sale or lease the property to you with an option to buy, you may be able to use a DSCR loan and buy the property with no money down. For example, if you find a seller who agrees to sell you a property for $200,000, and you agree to pay $1,500 per month for 10 years, with a $10,000 option fee and a $190,000 balloon payment at the end, you can use a DSCR loan and borrow $190,000, which is 95% of the purchase price. This way, you can buy a rental property with a small option fee and a low monthly payment, and refinance the balloon payment with a DSCR loan at the end of the term.
Using a hard money loan or a bridge loan. If you find a property that has a high DSCR and a low LTV, but you need to close quickly or you have a low credit score, you may be able to use a hard money loan or a bridge loan to buy the property with no money down, and then refinance it with a DSCR loan later. For example, if you find a property that has a NOI of $2,000 and a DS of $1,000, and you can buy it for $100,000, you can use a hard money loan or a bridge loan and borrow $100,000, which is 100% of the purchase price. This way, you can buy a rental property with no money down and a high cash flow, and then refinance it with a DSCR loan at a lower interest rate and a longer term.

What are the Pros and Cons of a DSCR Loan No Down Payment?

A DSCR loan can be a great financing option for real estate investors who want to buy or refinance rental properties without having to show their income or make a large down payment. However, like any other loan, a DSCR loan also has some pros and cons that you should consider before applying. Here are some of the main advantages and disadvantages of a DSCR loan:

Pros of DSCR Loan No Down Payment

No income verification or documentation. You do not need to provide any tax returns, pay stubs, W-2s, or bank statements to prove your income or employment. You only need to show the rental income and expenses of the property, which can be verified by the lender through an appraisal or a lease agreement. This can save you time and hassle, and also allow you to qualify for a loan even if you have irregular, seasonal, or self-employed income.
No DTI ratio requirement. You do not need to worry about your personal debt or expenses affecting your loan eligibility. You only need to show that the property can generate enough cash flow to cover the mortgage payment and other expenses. This can allow you to qualify for a loan even if you have high personal debt or low personal income.
Higher loan amounts and LTV ratios. You can borrow more money and finance a larger portion of the purchase price or appraised value using a DSCR loan, compared to a QM loan. Depending on the lender, the property type, and the market conditions, you can borrow up to 80% to 90% of the purchase price or appraised value using a DSCR loan, compared to 75% to 80% using a QM loan. This can allow you to buy more properties with less cash or equity.
Lower credit score requirement. You do not need to have a perfect credit score to qualify for a DSCR loan. Depending on the lender, the property type, and the market conditions, you can qualify for a DSCR loan with a credit score as low as 500 to 600, compared to 620 to 640 for a QM loan. This can allow you to qualify for a loan even if you have a bad credit history or a recent bankruptcy, foreclosure, or short sale.
Faster and easier approval and closing process. You can get approved and close a DSCR loan faster and easier than a QM loan, because the lender does not need to verify or consider your income or debt. You only need to provide the property information and your credit report, which can be done online or over the phone. Depending on the lender, you can get approved and close a DSCR loan in as little as 10 to 15 days,

DSCR loan eligibility requirements

A DSCR loan is a type of mortgage that is based on the debt-service coverage ratio (DSCR) of the property, rather than the borrower’s income or credit score. This means that you can qualify for a DSCR loan if the rental income from the property is enough to cover the monthly mortgage payment and other expenses, regardless of your personal income or debt situation. To be eligible for a DSCR loan, you need to meet the following requirements:

DSCR: You need to have a minimum DSCR of 1.0 or higher, meaning that the rental income should be equal to or greater than the mortgage payment and other expenses. Some lenders may require a higher DSCR, depending on the loan-to-value (LTV) ratio, the property type, the market conditions, and the borrower’s credit score.
Credit score: You need to have a minimum credit score of 620 to 700, depending on the lender and the loan amount. A higher credit score may entitle you to a lower interest rate and a higher LTV ratio.
Down payment: You need to make a minimum down payment of 20% to 25% of the purchase price or appraised value, whichever is higher. This is higher than most qualified mortgages (QM) loans, which have minimum down payments ranging from 0% to 3.5%. However, some lenders may offer zero down payment options, depending on the property value and the DSCR^.
Cash reserves: You need to have sufficient cash reserves to cover at least six months of mortgage payments and other expenses. This is to ensure that you can afford the loan in case of vacancy, repairs, or other contingencies.
Loan amount: You can borrow up to $5 million or more, depending on the lender and the property type. Most DSCR loans are available for single-family homes, 2-4 unit properties, and condos. However, some lenders may also finance larger properties, such as apartment buildings, mixed-use properties, or commercial properties.
Prepayment penalty: You may have to pay a prepayment penalty if you pay off the loan before the term ends. This is to compensate the lender for the loss of interest income. However, some lenders may offer prepayment penalty options, such as a declining penalty or a waiver after a certain period.
Property eligibility: You need to provide proof of the property’s rental income and expenses, such as a signed lease agreement or an appraisal. The lender will verify the property’s value and rental income potential, and calculate the DSCR accordingly. The property must be in good condition and meet the lender’s standards.

What is the interest rate for a DSCR Loan No Down Payment?

The interest rate for a DSCR loan depends on several factors, such as the lender, the property type, the loan amount, the loan term, the loan-to-value (LTV) ratio, the DSCR ratio, the borrower’s credit score, and the market conditions. According to the web search results, the current average DSCR loan interest rate is between 7.20% and 10.00%, as of November 2023. This is higher than the average interest rate for a conventional loan, which is about 7.24%, according to Bankrate. However, this may vary by lender and by the specific terms and conditions of the loan. Therefore, it is advisable to shop around and compare different offers from different lenders before applying for a DSCR loan.

Can I refinance my rental property with a DSCR Loan No Down Payment?

Yes, you can refinance your rental property with a DSCR loan, if you meet the eligibility and requirements of the lender. A DSCR loan is a type of mortgage that is based on the debt-service coverage ratio (DSCR) of the property, rather than the borrower’s income or credit score. This means that you can qualify for a DSCR loan if the rental income from the property is enough to cover the monthly mortgage payment and other expenses, regardless of your personal income or debt situation.

To refinance your rental property with a DSCR loan, you need to provide the following information and documents:

The property address and description
The current loan balance and interest rate
The desired loan amount and LTV ratio
The rental income and expenses
The DSCR calculation
The borrower’s credit report and score
The borrower’s bank statements and reserves
The borrower’s identification and proof of ownership

The benefits of refinancing your rental property with a DSCR loan are:

No income verification or documentation. You do not need to provide any tax returns, pay stubs, W-2s, or bank statements to prove your income or employment. You only need to show the rental income and expenses of the property, which can be verified by the lender through an appraisal or a lease agreement. This can save you time and hassle, and also allow you to qualify for a loan even if you have irregular, seasonal, or self-employed income.
No DTI ratio requirement. You do not need to worry about your personal debt or expenses affecting your loan eligibility. You only need to show that the property can generate enough cash flow to cover the mortgage payment and other expenses. This can allow you to qualify for a loan even if you have high personal debt or low personal income.
Higher loan amounts and LTV ratios. You can borrow more money and finance a larger portion of the property value using a DSCR loan, compared to a conventional loan. Depending on the lender, the property type, and the market conditions, you can borrow up to 80% to 90% of the property value using a DSCR loan, compared to 75% to 80% using a conventional loan. This can allow you to pull out more equity from your property or lower your monthly payment.
Lower credit score requirement. You do not need to have a perfect credit score to qualify for a DSCR loan. Depending on the lender, the property type, and the market conditions, you can qualify for a DSCR loan with a credit score as low as 500 to 600, compared to 620 to 640 for a conventional loan. This can allow you to qualify for a loan even if you have a bad credit history or a recent bankruptcy, foreclosure, or short sale.
Faster and easier approval and closing process. You can get approved and close a DSCR loan faster and easier than a conventional loan, because the lender does not need to verify or consider your income or debt. You only need to provide the property information and your credit report, which can be done online or over the phone. Depending on the lender, you can get approved and close a DSCR loan in as little as 10 to 15 days.

The drawbacks of refinancing your rental property with a DSCR Loan No Down Payment are:

Higher interest rate and fees. You may have to pay a higher interest rate and fees for a DSCR loan, compared to a conventional loan. This is because a DSCR loan is considered a non-qualified mortgage (non-QM) loan, which has more risk and less regulation than a qualified mortgage (QM) loan. According to the web search results, the current average DSCR loan interest rate is between 7.20% and 10.00%, as of November 2023. This is higher than the average interest rate for a conventional loan, which is about 7.24%, according to Bankrate. However, this may vary by lender and by the specific terms and conditions of the loan.
Prepayment penalty. You may have to pay a prepayment penalty if you pay off the loan before the term ends. This is to compensate the lender for the loss of interest income. Most DSCR loans have a prepayment penalty of 3-2-1 or 5-4-3-2-1, meaning that you pay a percentage of the outstanding loan balance as a penalty for each year of the penalty period. For example, if you have a 5-4-3-2-1 prepayment penalty and you pay off the loan in the third year, you have to pay 3% of the loan balance as a penalty. However, some lenders may offer prepayment penalty options, such as a declining penalty or a waiver after a certain period.
Property eligibility. You need to provide proof of the property’s rental income and expenses, such as a signed lease agreement or an appraisal. The lender will verify the property’s value and rental income potential, and calculate the DSCR accordingly. The property must be in good condition and meet the lender’s standards. Some lenders may have restrictions on the property type, location, occupancy, or age.

These are the general pros and cons of refinancing your rental property with a DSCR loan. However, different lenders may have different criteria and terms, so it is advisable to shop around and compare different offers before applying for a DSCR loan.

Conclusion DSCR Loan No Down Payment

A DSCR loan can be a great financing option for real estate investors who want to buy or refinance rental properties without having to show their income or make a large down payment. However, a DSCR loan also has some drawbacks, such as a higher interest rate, a prepayment penalty, and a higher down payment requirement. Therefore, it is important to weigh the pros and cons of a DSCR loan and compare it with other financing options before applying.

I hope this article about DSCR Loan No Down Payment has helped you understand what a DSCR loan is, how it works, and how you can buy rental properties with no down payment and no income verification using this financing option. Thank you for reading and good luck with your real estate investing!