DSCR Loan Program Down Payment Requirements for 2022
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August 1, 2022

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DSCR loan program down payment

You can get a DSCR loan with as little as 20% down.

That’s a reasonable requirement considering this loan requires no tax returns, W2s, or pay stubs. It’s one of the only no-income-verification loans in today’s market.

Lenders review the loan based on the property’s income, not yours.

This is a huge advantage for full-time or just-starting investors who don’t have two years’ tax returns showing high personal income.

DSCR loans come with all sorts of benefits for those looking to build their real estate portfolio fast.

Submit your DSCR loan scenario.

What’s in this article?

Why DSCR loans require a down payment
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Bigger down payments help you qualify
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Shop around for the right down payment
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Other DSCR requirements
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Is a DSCR loan right for you?
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FAQ
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Apply for a DSCR loan
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Why do DSCR loans require a down payment?

A DSCR loan is for investment properties, a property type that almost always requires a down payment. 

Lenders view rental properties as higher risk compared to primary residences. So higher rates and down payments typically come with this program.

If you buy a primary residence with an FHA loan, for instance, you only need 3.5% down. A conventional loan requires just 3% down.

But these down payments aren’t available unless you plan to live in the home, or at least in one of the units if it’s a 2-4 unit property.

But the DSCR loan program down payment is actually a very good deal, considering most fully-documented investment property loans require 15%-20% down.

Depending on the DSCR lender, you can get a similar down payment as on a fully-documented conventional loan without proving personal income. 

A bigger down payment can help you qualify for DSCR loans

Down payments can be a challenge to come up with. But a bigger one can also help you qualify for the mortgage more easily.

To qualify for a DSCR loan, some lenders require a debt service coverage ratio of 1.25x, meaning the property brings in 25% more income than the full payment. (Some lenders allow a lower DSCR.)

Here’s how a bigger down payment can help you achieve a stronger debt coverage ratio.

20% down25% down
Home price$250,000$250,000
Down payment$50,000$62,500
Loan amount$200,000$187,500
PITIA payment$1,482$1,407
Property income$1,750$1,750
DSCR1.18x1.24x

Payments for example purposes only. Rates and payments may not be currently available.

A lender that requires 1.25 DSCR will be more likely to approve your scenario if you put 25% down in this scenario. The higher down payment lowers the monthly payment, bringing the DSCR closer to the requirement.

See if you’re eligible for a DSCR loan.

Shop around for the right DSCR loan down payment

Not all DSCR lenders offer the same rates, fees, terms, and yes, down payment requirements.

If you speak to one DSCR lender who requires 25% down, but you only have 20%, keep shopping.

There are no nationwide DSCR down payment requirements like there are with conventional Fannie Mae and Freddie Mac loans. 

DSCR loan rules are created by individual banks and lenders. So, lenders have a lot of flexibility to approve “make-sense” deals even if the scenario falls a bit outside their own guidelines.

DSCR Loan guidelines and fast facts. All about Debt Service Coverage Ratio loans.

Other DSCR loan requirements

Besides down payment, here are some general requirements that may apply, depending on your lender.

  • 640 credit score or higher
  • Property purchase, cash-out, or rate/term refinance
  • 1-4 unit residential, 5+ unit commercial
  • Non-warrantable condos and unique homes
  • Loan amounts up to $5 million
  • Fixed rate loans, adjustable rate loans, and interest-only
  • DSCR of less than 1.0 with proof of employment income or additional assets
  • Close in the name of an LLC
  • Short-term and long-term rentals
  • No limit on number of financed properties owned
  • Often come with pre-payment penalties to discourage early pay-off

The debt service coverage ratio program is best for real estate investors who can’t prove income with tax returns or traditional employment income.

You might be a full-time investor, a new investor with inadequate income history, a self-employed individual in another field who also invests in real estate, or a retiree.

All of these investors would have a hard time qualifying for a traditional loan because of the income verification requirement. 

DSCR loans are “non-QM” loans, meaning they don’t have to follow rules set out by the Dodd-Frank Act. These are legal loans; non-QM just means the lender doesn’t get some of the federal protections that QM lenders do.

As an investor, though, it means that you can supercharge your real estate acquisition strategy.

You don’t have to worry about qualifying for each home based on personal income. The home qualifies on its own accord, using proposed income compared to the payment.

FAQ

Do you need a down payment for a DSCR loan?

Yes, typically around 20-25%. Even if the rental income would cover the entire payment at zero down, you still need to make a down payment. This allows the lender to offer this no-income-verification loan at lower risk.

How much is a down payment on a DSCR loan?

Most DSCR lenders require 20-25% down but may require more for new investors or those with a DSCR of less than 1.0.

What are DSCR mortgage rates?

Mortgage rates vary based on lender and the strength of the scenario. Typically, DSCR rates are about 1% higher than rates for traditional loans.

Can I get a DSCR loan?

Investors who have 20-25% down and are buying a home with a strong rent-to-payment ratio may be approved for a DSCR loan. Apply with a DSCR lender to know for sure.

Build your real estate portfolio

DSCR loan down payments are quite reasonable considering the benefits of this product.

Grow your real estate portfolio fast, even without verifying your personal income.

Submit your DSCR loan scenario.

Photo by Zac Gudakov on Unsplash

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