The Ultimate Guide to DSCR Loans for Foreign Nationals

The best kept secret in real estate just might be DSCR loans. Luckily for you, we’re no good at keeping secrets!
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Short for debt-service-coverage-ratio (DSCR), these rental property loans are the perfect alternative to traditional financing. It can make investing in U.S. real estate as a foreign national much more accessible. This very powerful investment tool could unlock access to rental properties and the cash flow that comes with them.

This article provides answers to some of the most common questions you and other non-U.S. real estate investors have about DSCR loans.

What is a DSCR loan?

Simply put, a DSCR loan is based upon the performance of a property as an asset. DSCR loans help lenders evaluate risk and ensure cash flow stability. It takes into consideration the amount of rental income a property can produce as compared to what the monthly mortgage payment is. This is different from a traditional mortgage which factors in your personal income using a debt-to-income ratio– a DSCR loan is solely focused on the property as an asset.

As a real estate investor, this is beneficial because it helps you evaluate the risk and estimated/potential returns of your potential investment.

Understanding when to use a DSCR loan

What’s your real estate investment strategy? DSCR loans are great for foreign real estate investors pursuing certain avenues, but not others. Before asking a lender about a DSCR loan, it’s crucial to understand when it makes sense to use one.

Use a DSCR loan when… 

In short, DSCR loans are used for rental properties. There are loan products for both long-term and short-term rental properties:

• Long-term rental properties: Ideal for properties leased to tenants on annual or multi-year agreements. This strategy provides steady, predictable cash flow, making them a great option for investors looking for stability and long-term returns.
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• Short-term vacation rentals: With the rise of platforms like AirBnb and VRBO, short-term rentals have proven to be viable business models. DSCR loans can also help investors acquire vacation rentals intended for these purposes. Since an AirBnB’s rental income varies greatly by location, property type, and other factors, lenders often use projections from AirDNA to help gauge potential income. Note, not all lenders offer loans for short-term rentals. 

Waltz can help you get a DSCR loan to fund your next AirBnb or a cash flowing rental property.

Don’t use a DSCR loan if… 

Real estate investing is all about choosing the appropriate financial tools depending on the situation. You wouldn’t use a sledgehammer to fix a computer, would you? These are examples of when you need to choose a different loan option:

• Primary residence: Your home is not an investment property, which eliminates this as an option. 

• Personal Vacation property: Want a condo by the beach for the warmer weather months? While that sounds amazing, a second home is not eligible for a DSCR loan.
   
• Fix-and-flips: Flipping houses can be lucrative, but this strategy often requires short-term financing. These are also at higher interest rates because of the risks associated with them. Once the property is renovated, however, some investors like refinancing out of a fix-and flip loans into DSCR loans.
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• Land development: Have you ever wanted to build a house from the ground up? That’s what we like to call land development. Like flipping, this has a higher risk profile and often uses short-term financing options like bridge loans.
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• Commercial for business use: If you want to lease commercial property such as a gas station or a restaurant, a DSCR loan is unlikely the right fit as the analysis varies.

Customizing your loan terms and conditions

DSCR loans aren’t a one-size fits all solution. What you want out of an investment property might be totally different than another investor. There are a variety of terms and conditions to explore as you speak with different lenders. Be sure to ask about DSCR loan requirements, such as the following:

• Loan length/repayment period: 30 and 15 year repayment periods are the most common, but some lenders often have a number of selections to choose from. Your monthly payment and total interest paid over the length of the loan will be affected by this selection.
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• Adjustable rate mortgage: Sometimes lenders offer loans that stay at a given interest rate for a certain period of time, then adjust based on the market after that timeframe. 
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• Fixed rate mortgage: With a fixed rate mortgage, the interest rate remains constant throughout the life of the loan. This stability can make budgeting easier, as your monthly payments won’t fluctuate with market changes. Want to learn more?– we built a mortgage guide just for you.
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• Prepayment penalties: DSCR lenders want to incentivize investors to hold properties for multiple years. There are different options for the number of years you need to hold to avoid these penalties depending on your lender.

As you begin to mix-and-match different options, be aware that your interest rate may vary depending on these factors. Be sure to ask your lender how each condition impacts your overall payments.

Common lender considerations

To fund, or not to fund, that is the question! As a lender determines the feasibility of your DSCR loan application, there are certain general guidelines each will follow. Some of the most common considerations include:

• Loan-to-value (LTV) ratio: If you’re buying an investment property with financing, you’re using leverage.  The less money you put into a deal, the higher your leverage. As such, DSCR lenders often look for a 75% LTV or below because it limits their risk and shows that you’re serious as an investor by having significant skin in the game. So if your investment property is worth $200,000 they may fund up to $150,000 as a mortgage. In this case, you would need the difference ($50,000) as a downpayment.

• Property type: Most DSCR loans are available for single family rentals, condos, townhomes, and 2-4 unit multifamily properties.
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• Loan limits: These range from lender to lender, some will let you borrow up to $2 million. 
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• Business structure: To be eligible for a DSCR loan, the borrower must do so under an American business entity. If you don’t have one, Waltz can help– our investor kit sets you up with an LLC and everything else you need to start investing in U.S. real estate.
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• DSCR score: Generally speaking, the higher the number is above 1 (the break even point), the more likely it will be considered for financing. The better the deal you find, the better your chances are of getting approved. The next section covers this equation in depth.

How to calculate a DSCR score

DSCR loans use different criteria and are calculated differently than conventional financing options. When a lender reviews a conventional loan, they take into account an individual’s ability to repay the loan which is called your debt-to-income ratio. In contrast, a DSCR loan focuses on the rental property’s ability and income to pay for the loan itself. 

The lender will run a calculation to see if the property will make money. The formula is as follows:

‍DSCR = Net operating income (NOI) / Total debt service

Breaking down the equation

To get a better understanding of how this works, let’s break down each of the terms in the equation.

‍Net Operating Income (NOI)= Revenue - Operating Expenses

NOI determines what’s left over from your rental income after all expenses are paid. Expenses might include property management fees, maintenance, utilities, or other day-to-day operational costs.

‍Total Debt Service= Principal + Interest + Taxes + Insurance

Your total debt service is basically all of the components of your mortgage. In a loan payment, the principal is the amount that goes toward paying down the loan, while interest represents the profit the lender makes from the loan. Keep in mind that if you have Homeowners Association (HOA) fees, this would also be included here.

DSCR example

Imagine that you purchased a rental property in Miami, Florida in a great location. You find renters who pay  $4,000 a month and you don’t have any  additional operating expenses, while the mortgage you own to your lender is $3,000 per month. Let’s calculate the DSCR based on those numbers:

‍DSCR =$4,000 (NOI) / $3,000 (Total Debt Service)

Based on the calculation above, the property has a DSCR of around 1.33. From the lender’s perspective, this is favorable because it provides a significant cushion of income above the break even point. It’s also more favorable to the investor for the same reason. Think of the lender as your teammate when it comes to DSCR loans– when you win, they win.

Can you get a DSCR loan as a foreign national?

The good news is that you don’t need to be an American citizen to be eligible for a DSCR loan. The bad news is that every lender has their own set of eligibility requirements, some more favorable to foreign nationals than others. On top of that, there are other considerations investors abroad face that make it harder to invest in real estate.

Now, back to the good news!

At Waltz, we're breaking down barriers to make DSCR loans more accessible for non-U.S. real estate investors. These are some of the most common problems foreign nationals face and how we help you overcome them:

• Credit score: Many lenders will request your American credit score. If you don’t have one, how is it possible to get a loan? Waltz reviews your financial history wherever you call home.
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• Identification: What if you don’t have a social security number or an American passport? Not a problem, Waltz requires your passport from your home country and gathers all relevant information accordingly. 
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• Proof of income: Even though DSCR loans are based on the property’s performance, it’s still important to know how you earned your money and what your bank statements look like. Typically, we'll ask for documents like Financial Statements, Bank Statements, income source information, and other relevant paperwork to comprehensively understand your financial situation.
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• Forming a business: DSCR loans are only issued to businesses, but forming an LLC can take months, especially for foreigners. You who might need to fax certain documents or even mail them– that’s not a typo, it’s an old school process. At Waltz, we take the new school approach: you can purchase your  LLC with an EIN number in just 20 minutes or so. That way, you can start buying properties right away!
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• U.S. bank account: Operating a business and purchasing real estate requires a U.S. bank account. As part of your investor kit when you onboard with Waltz, you will get access to a digital bank account in the US.
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• Currency exchange: Exchange rates vary and in some cases, your home country may have limitations on what you can transfer. This could delay your closing date. We’ve established partnerships that make currency exchange simpler and at competitive rates.

Apply for a DSCR loan with Waltz

DSCR loans offer a unique opportunity to buy U.S. real estate without the added hurdles foreign investors often face to get financing. By focusing on the property’s income potential rather than personal financial history, these loans empower investors like you to purchase rental opportunities. 

Waltz helps you navigate the entire real estate investment journey from LLC formation and obtaining a U.S. bank account to getting a DSCR loan. Schedule a call to discuss how you can get approved and close in as little as 14 days.