Here's What You Need to Know Before Applying for a DSCR loan

DSCR (debt-service-coverage-ratio) loans are the ultimate cheat code for real estate investors– especially foreign nationals. As long as you plan on acquiring income-generating properties, a DSCR loan allows you to avoid the need for U.S. based income and U.S. credit scores.

Before applying for a DSCR loan, though, you need to ask yourself several key questions. These will help you determine if a DSCR loan is the right fit for your investment strategy, what qualifications you'll need, and how to navigate the unique requirements that may apply to foreign investors. Here's everything you need to know as you prepare to apply for a DSCR loan.

Key takeaways:

• To qualify for a DSCR loan as a foreign national, you do not need a U.S. credit score. However you’ll need  a down payment of at least 20-30%, and a business entity like an LLC.
  
  
• A DSCR ratio above 1 is often required for loan qualification, indicating you have enough cash flow to cover debt payments. The higher above 1, the better.
  
  
• DSCR loans are ideal for short-term and long-term rental strategies, but cannot be used for primary residences, vacation homes, or other property types and strategies mentioned below.

Is a DSCR loan the right choice for you?

DSCR loans are best suited for short-term and long-term rental strategies. For long-term rentals, DSCR loans can help you invest in properties that provide steady, predictable cash flow. With short-term vacation rentals, the DSCR loan can also be a way for you to invest in highly coveted tourist destinations.

Remember that there are also cases where DSCR loans would not make sense or qualify. These include:

• Primary residence: You’ll only be eligible for DSCR loans if they’re for investment purposes. They can’t be used to buy a primary residence.
  
  
• Personal vacation property (second home): Similar to the rules for primary residences, the DSCR loan can’t be used to invest in a second or vacation home.
  
  
• Fix-and-flips: You may be tempted to invest in a property and immediately flip it, but this will require short-term financing. Lenders find fix-and-flip loans riskier, so they have higher interest rates.
  
  
• Land development: Like fix-and-flip investments, land development requires short-term financing options like bridge loans. Bridge loans will offer temporary funds until you secure a more permanent income, but like other short-term options, you’ll have to deal with higher interest rates.
  
  
• Commercial use: If you plan to invest in a commercial property like a gas station or restaurant, consider a different loan option. 

Learn more about DSCR loans.

What’s your DSCR?

DSCR is calculated by dividing your net operating income by your debt service. To simplify that calculation further, divide what’s left over from your rental income after all expenses by the money required to pay the principal amount and the interest on the loan.

A ratio of 1 means you’re just about breaking even. A ratio of more than 1 means that you’re not only covering your debt but also having money left over. This is how your DSCR ratio allows a lender to see if you have a steady cash flow to cover debt payments. This is also how lenders can estimate their potential risk.

Your DSCR can vary based on factors related to your status and the property, but it needs to be above 1 for most lenders. In fact, some  lenders will require you to have a score of at least 1.25 to qualify. At Waltz, we allow foreign national investors to be eligible with a DSCR higher than 1. Still, the higher your DSCR, the better the loan conditions you can negotiate. 

Your DSCR score may also affect factors like the required down payment and the number of months of cash reserves you need to qualify for the DSCR loan.  

Can you improve your DSCR?

If your DSCR is lower than you’d like, there are several avenues you can explore to try to increase the score. You can improve your DSCR by increasing a property’s profitability as well as by decreasing your expenses. Here are some examples:

• Increase rental income: Let’s pretend that you’re buying a property that’s rented at below market rent prices. One method is directly increasing your tenant’s rent to match comparable market rates.
  
  
• Decrease your interest rate: To decrease your interest rate on an investment property, consider paying points upfront, which are fees that reduce your rate in exchange for a larger payment at closing. Additionally, shopping around and comparing offers from multiple lenders can help you find the most competitive rates.
  
  
• Explore cheaper insurance options: Shopping around for the best rates and raising your deductible can help lower insurance costs for your investment property. Using the same insurance company for multiple investment properties may also help you obtain a discount. 

How to qualify for a DSCR Loan 

There are a variety of factors that lenders will evaluate, which are important to keep in mind before applying. Remember that some loans may have lender-specific conditions, but there are a few standard requirements for qualification.

Minimum credit score 

Most lenders will evaluate your credit history and some proof of financial stability. If you have a U.S. credit score, lenders may want a credit score in the mid 600s although this may vary. You may be offered even better rates with a higher credit score. Lenders will also consider whether you have significant credit issues, including foreclosures, bankruptcies, or late payments.

If you don’t have a U.S. credit score, don’t worry! Waltz specializes in working with foreign investors and understands that there are other ways to determine someone’s creditworthiness.

Apply for a DSCR loan.

Minimum down payment 

Down payments for loans are often decided through a calculation called loan-to-value ratio (LTV). The LTV ratio is found by dividing your mortgage amount by the appraised property values. 

Depending on a variety of factors (like a property’s DSCR score), the LTV ratio could be around 70-80%. The remaining percentage will be the required down payment. You must be prepared for a 20-30% down payment at minimum.

Appraisal

Always keep the end in mind. As you enter the loan process, the lender will want to conduct an appraisal on the prospective property to determine its current market value and rental income potential. If the property is in poor condition or would otherwise not appraise at the value needed to get approved, you may want to consider other properties or loan options depending on your strategy.

Property type

DSCR loans are designed specifically for income-generating investment properties. At Waltz, these loans can be applied to a variety of property types, including:

• Single-family properties: These properties are standalone homes that offer privacy and are often sought after by families due to their space and potential for long-term appreciation.
  
  
• Condos: Condominiums are individual units within a larger building, often in urban areas, with shared maintenance covered by HOA fees.
  
  
• Townhomes: Townhomes offer the privacy of a single-family home with shared walls and an HOA managing exterior maintenance.
  
  
• 2-4 Unit multi-family properties: Multi-family properties, like duplexes or triplexes, provide multiple rental units in one building, offering diversified income and reduced risk.

Minimum loan amount

A minimum loan amount is the least amount of money you must borrow from a lender to qualify for a loan, not the property’s cost. For DSCR loans, although this varies by lender, it’s typically above $100,000. 

Business entity

To obtain a DSCR loan, you’ll need to apply through a business entity, such as an LLC or similar structure, rather than as an individual. Waltz offers an Investor Kit that helps you quickly set up an LLC and a U.S. bank account in just minutes, streamlining the process.

How to evaluate DSCR lenders

Just like a lender evaluates whether or not you qualify for their DSCR loans, as an investor, you, too, need to analyze whether potential lenders meet your requirements. Each lender will have variable interest rates, LTV ratios, down payment requirements, and loan terms (loan payment schedule, pre-payment penalties, etc). Let’s discuss a few of these variables in detail that you may find on a lender’s term sheet:

• Interest rates: Interest rates are a crucial factor to consider when exploring lenders, as they directly affect the overall cost of your loan. A higher interest rate will increase your monthly payments and the total amount you pay over the life of the loan. Comparing rates from different lenders can help you find the best deal and potentially save you significant money in the long run.
  
  
• LTV ratios: The LTV ratio determines how much you'll need to put down for your investment property. It compares the loan amount to the appraised value of the property, with a lower LTV ratio typically requiring a larger down payment. A higher LTV ratio means a smaller down payment, but it may also result in higher interest rates or less favorable loan terms.
  
  
• Loan terms: The terms of your DSCR loan will fluctuate depending on which lender you choose. Some may require an overly rigid payment schedule or impose pre-payment penalties that may delay your plans with an investment property.
  
  
• Experience with foreign nationals: The most significant thing you need to keep in mind with lenders is whether they have experience working with foreign national investors. While the documentation process can vary depending on the lender you’re looking at, the application process and the documents required are not always foreign-national-friendly. Waltz specializes in working with foreign nationals and helps investors from abroad close deals regularly.

Apply for a DSCR loan–without the hassle

Applying for a DSCR loan can be straightforward if you understand the requirements and choose the right lender. Waltz simplifies getting a DSCR and guides you throughout the application process. With the ability to bypass a need for U.S.-based income and credit scores, DSCR loans provide flexibility for foreign national investors looking to acquire income-generating properties. 

Ready to get started? 

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