DSCR Loans with No Down Payment: How to Buy Rental Properties

Are you looking for a way to invest in real estate without having to save up for a large down payment? Do you want to take advantage of the low-interest rates and high rental demand in the market? If so, you might be interested in learning about DSCR loans.

DSCR stands for Debt Service Coverage Ratio, and it is a type of loan that is designed for investors who want to buy rental properties. Unlike conventional loans, DSCR loans do not require you to verify your income, employment, or debt-to-income ratio. Instead, they only look at the cash flow of the property and whether it can cover the monthly loan payments.

This means that you can qualify for a DSCR loan even if you have a low or irregular income, or if you already have multiple mortgages. You can also use a DSCR loan to refinance your existing rental properties and lower your interest rate or cash out some equity.

But the best part about DSCR loans is that they can allow you to buy rental properties with no money down. Yes, you read that right. You can buy a property that generates passive income without having to put any of your own money into the deal. How is that possible? Let’s find out.

What are DSCR Loans?

DSCR loans are a type of non-QM (non-qualified mortgage) loans that are designed for real estate investors who want to buy or refinance rental properties. Unlike conventional loans, DSCR loans do not require you to provide any personal income or tax documents, such as W-2s, pay stubs, or tax returns. Instead, DSCR loans use the debt service coverage ratio (DSCR) of the property to determine your eligibility and loan terms.

The DSCR is calculated by dividing the net operating income (NOI) of the property by the total debt service (TDS) of the property. The NOI is the income that the property generates after deducting all operating expenses, such as taxes, insurance, maintenance, and property management fees. The TDS is the sum of the principal and interest payments of the loan, plus any other debt obligations of the property, such as HOA fees or second mortgages.

For example, let’s say you want to buy a rental property that has a monthly NOI of $2,000 and a monthly TDS of $1,500. The DSCR of the property would be:

DSCR = NOI / TDS
DSCR = $2,000 / $1,500
DSCR = 1.33

This means that the property generates 1.33 times more income than its debt obligations, which indicates that the property is profitable and can cover the loan payments and expenses.

Different lenders have different DSCR requirements, but generally, a DSCR of 1.2 or higher is considered acceptable. This means that the property’s income should be at least 20% higher than its debt obligations. Some lenders may accept lower DSCRs, but they may charge higher interest rates or require larger down payments.

The main advantage of DSCR loans is that they allow you to buy rental properties with no money down, as long as the property’s income meets the DSCR requirement. This means that you can leverage the power of other people’s money (OPM) to acquire more properties and increase your cash flow and equity. You can also use DSCR loans to refinance your existing rental properties and lower your interest rate or cash out some equity.

Another benefit of DSCR loans is that they are more flexible and lenient than conventional loans. Since DSCR loans do not require any personal income or tax documents, they are ideal for self-employed borrowers, foreign nationals, or borrowers with complex income streams. DSCR loans also have less stringent credit and asset requirements, which means that you can qualify for them even if you have a low credit score, a high debt-to-income ratio, or a limited amount of reserves.

However, DSCR loans also have some drawbacks that you should be aware of. One of the main disadvantages of DSCR loans is that they have higher interest rates and fees than conventional loans. This is because DSCR loans are considered riskier by lenders, as they do not verify your income or ability to repay the loan. Therefore, you should expect to pay a higher interest rate, origination fee, appraisal fee, and closing costs when using DSCR loans.

Another drawback of DSCR loans is that they have lower loan-to-value (LTV) ratios than conventional loans. The LTV ratio is the percentage of the property’s value that the lender is willing to lend you. For example, if a property is worth $100,000 and the lender offers you an 80% LTV loan, you can borrow up to $80,000 and you have to put down $20,000 as a down payment. The lower the LTV ratio, the more money you have to put down.

DSCR loans typically have LTV ratios ranging from 65% to 80%, depending on the lender, the property type, and the DSCR. This means that you may still have to put down some money when using DSCR loans, unless you find a property that has a very high DSCR and a very low purchase price. For example, if you find a property that has a DSCR of 1.5 and a purchase price of $75,000, you may be able to get a 100% LTV loan and buy the property with no money down.

How to Get Started with DSCR Loans

If you are interested in using DSCR loans to buy rental properties with no money down, here are some steps that you can follow to get started:

1. Find a lender that offers DSCR loans: Not all lenders offer DSCR loans, as they are a niche product that caters to a specific segment of real estate investors. Therefore, you may have to do some research and networking to find a lender that specializes in DSCR loans. You can use online platforms, such as LendingTree or BiggerPockets, to compare different lenders and their terms and rates. You can also ask for referrals from other investors, brokers, or agents who have experience with DSCR loans.
2. Get pre-approved for a DSCR loan: Once you find a lender that offers DSCR loans, you should get pre-approved for a loan amount and rate that suits your needs and goals. To get pre-approved, you will have to fill out an application form and provide some basic information about yourself and the property that you want to buy or refinance. The lender will then run a credit check and verify the property’s income and expenses. Based on the DSCR and the LTV of the property, the lender will give you a pre-approval letter that states how much you can borrow and at what rate and terms.
3. Find a rental property that meets the DSCR requirement: After you get pre-approved for a DSCR loan, you can start looking for a rental property that meets the DSCR requirement and your investment criteria. You can use online platforms, such as Zillow or Realtor, to search for properties that are for sale or rent in your target market. You can also use direct mail, bandit signs, or word-of-mouth to find off-market deals that may have less competition and better prices. When you find a potential property, you should analyze its cash flow and DSCR using a spreadsheet or a calculator. You should also inspect the property and conduct due diligence to make sure that it is in good condition and has no hidden issues or liens.
4. Make an offer and close the deal. Once you find a rental property that meets the DSCR requirement and your investment criteria, you can make an offer to the seller and negotiate the price and terms of the deal. You should use your pre-approval letter as proof of funds and a bargaining tool to show the seller that you are a serious and qualified buyer. You should also include a contingency clause that allows you to back out of the deal if the property does not appraise for the agreed-upon value or if the lender does not approve the loan. After you and the seller agree on the deal, you can sign a purchase contract and open escrow. The lender will then order an appraisal and a title search to confirm the value and the ownership of the property. The lender will also prepare the loan documents and the closing disclosure that outline the final loan amount, rate, fees, and payments. You will then review and sign the loan documents and the closing disclosure, and pay any closing costs and fees. The lender will then wire the loan amount to the escrow account, and the escrow agent will transfer the title and the keys to you. Congratulations, you have just bought a rental property with a DSCR loan no down payment.

Key to Buying Rental Properties with DSCR Loans No Down Payment

The key to buying rental properties with no money down using DSCR loans is to find properties that are undervalued or need some repairs. These properties are often sold by motivated sellers who are willing to accept a lower price or offer seller financing. You can use online platforms like Zillow, Trulia, or Realtor.com to search for these properties, or you can work with a local real estate agent who specializes in finding distressed properties.

Once you find a property that meets your criteria, you can make an offer that includes one or more of the following strategies:

• Seller financing: This is when the seller agrees to lend you some or all of the purchase price, and you pay them back in monthly installments. You can negotiate the terms of the loan, such as the interest rate, the duration, and the down payment. You can then use a DSCR loan to pay off the seller’s financing in full or in part, depending on how much you borrowed from the seller. This way, you can avoid paying any money out of pocket, and you can also get a lower interest rate on your DSCR loan.
• Subject-to-financing: This is when you take over the existing mortgage on the property, and you pay the seller the difference between the purchase price and the loan balance. You can then use a DSCR loan to pay off the subject-to-financing in full or in part, depending on how much you owe the seller. This way, you can avoid paying any money out of pocket, and you can also benefit from the low interest rate and the long amortization period of the existing mortgage.
• Lease option: This is when you lease the property from the seller for a certain period, and you have the option to buy it at a predetermined price at the end of the lease. You can then use a DSCR loan to exercise your option and buy the property when the lease expires. This way, you can avoid paying any money out of pocket, and you can also lock in a low purchase price and build some equity while you rent the property.

As you can see, these strategies can help you buy rental properties with DSCR loans with no down payment. However, they also come with some risks and challenges. For example, you might have to deal with legal issues, title problems, or liens on the property. You might also have to deal with the seller’s lender, who might not approve of the transfer of ownership or the change of loan terms. Therefore, you should always consult with a real estate attorney and a mortgage broker before you use any of these strategies.

Benefits of Buying Rental Properties with DSCR Loans with No Down Payment

Buying rental properties with no money down using DSCR loans can offer you several benefits, such as:

• Higher return on investment: By using other people’s money to buy rental properties, you can increase your return on investment, since you are not putting any of your own money into the deal. You can also leverage the power of compounding since you can reinvest your rental income and appreciation into more properties.
• Faster portfolio growth: By using DSCR loans, you can buy more properties in a shorter period, since you do not have to wait until you save up enough money for a down payment. You can also take advantage of the market cycles since you can buy low and sell high, or refinance and cash out when the values go up.
• Tax benefits: By using DSCR loans, you can enjoy the tax benefits of owning rental properties, such as depreciation, mortgage interest deduction, and capital gains exclusion. You can also use a 1031 exchange to defer your taxes when you sell one property and buy another one of equal or greater value.

How to Qualify for a DSCR Loan

To qualify for a DSCR loan, you need to meet the following criteria:

• Property type: The property must be a residential or commercial property that is used for rental purposes. It can be a single-family home, a duplex, a triplex, a fourplex, or a multi-unit building. It can also be a mixed-use property, such as a retail store with apartments above it.
• Property value: The property must have a value that is equal to or greater than the loan amount. You can use an appraisal, a broker’s price opinion, or a comparative market analysis to determine the value of the property.
• Property cash flow: The property must have a positive cash flow that is sufficient to cover the monthly loan payments. The cash flow is calculated by subtracting the operating expenses from the gross rental income. The operating expenses include taxes, insurance, maintenance, repairs, vacancies, and management fees. The DSCR is calculated by dividing the cash flow by the loan payment. The minimum DSCR required by most lenders is 1.2, which means that the cash flow must be at least 20% higher than the loan payment.
• Credit score: The credit score is not a major factor for DSCR loans, since they are based on the property’s performance rather than the borrower’s income. However, most lenders still require a minimum credit score of 620, which is considered fair. If you have a lower credit score, you might have to pay a higher interest rate or a larger down payment.
• Down payment: The down payment required for DSCR loans varies depending on the lender, the property type, and the loan amount. Generally, the down payment ranges from 15% to 25% of the purchase price. However, as we discussed earlier, you can use creative financing strategies to reduce or eliminate the down payment.

Where to Find DSCR Loans

DSCR loans are not offered by traditional banks or credit unions, since they do not conform to the conventional lending standards. Instead, they are offered by alternative lenders, such as private lenders, hard money lenders, or online lenders. These lenders are more flexible and faster than traditional lenders, but they also charge higher interest rates and fees.

To find DSCR loans, you can use online platforms like LendingTree, LendingHome, or Visio Lending, which connect you with multiple lenders who offer DSCR loans. You can also use online directories like BiggerPockets, Scotsman Guide, or C-Loans, which list hundreds of lenders who specialize in DSCR loans. You can also work with a mortgage broker who has access to various lenders who offer DSCR loans.

Conclusion

DSCR loans are a great option for investors who want to buy rental properties without having to verify their income, employment, or debt-to-income ratio. They are also a great option for investors who want to buy rental properties with no money down, by using creative financing strategies such as seller financing, subject-to-financing, or lease options.

However, DSCR loans also come with some risks and challenges, such as legal issues, title problems, or liens on the property. Therefore, you should always do your due diligence and consult with a real estate attorney and a mortgage broker before you use DSCR loans.

If you are interested in learning more about DSCR loans, or if you need help with finding and applying for DSCR loans, you can contact us. Just send me a message and we’ll be happy to help you. 😊