In terms of pricing loans (determining how good a rate and fee combination is quoted), DSCR Lenders are primarily concerned with their main risk: the chance of the borrower defaulting on the loan by not paying the interest and principal due. Simply, there are three factors that determine the rate and terms for a DSCR Loan (outside of overall market factors). These factors are:
While all of these factors are very important in determining interest rate and fees, even though DSCR Loans are literally named after “DSCR,” that particular ratio is arguably less important than the LTV ratio and credit score, often abbreviated to “FICO” (for “Fair Isaac Corporation, the pioneer in developing credit scores). This is actually similar to how conventional or other non-QM loans are priced as well, with the big distinction between DSCR Loans and other residential mortgage loans is that the DSCR ratio replaces the DTI (Debt-To-Income Ratio) as one of the top three factors. Well-informed borrowers will catch that just because DSCR replaces DTI for the underwriting of these loans does not mean that DSCR Loans are asset-based loans or based only on the property, as credit score or FICO of the individual borrower (or guarantor) is still one of the top, if not the top, determinant for qualification and loan terms!
These three metrics, qualifying credit score (FICO), loan-to-value (LTV), and debt service coverage ratio (DSCR) are critical because each addresses a different dimension of the DSCR Lender’s core concern: the risk of borrower default. They also help assess the potential for loss recovery if a default does occur, whether through foreclosure or personal guaranty.
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Harpoon Capital infographic illustrating the three main risk metrics for DSCR loans: Qualifying Credit Score (FICO) for borrower history, Loan-To-Value Ratio (LTV) for collateral equity, and Debt Service Coverage Ratio (DSCR) for property cash flow.
Credit score (FICO) evaluates the individual investor’s track record with debt repayment. It gives the lender a sense of whether the sponsor has historically honored their obligations, especially with mortgage-related credit. This metric focuses on the borrower (guarantor) as the risk variable.
Loan-to-Value ratio (LTV) evaluates the all-important collateral securing the DSCR Loan. In the event of default, the lender’s main way to avoid loss is through foreclosure; and the greater the difference between the value of the property and the amount owed (loan balance), the less likelihood that the lender will incur a loss on the loan. And the LTV ratio measures this difference.
Debt Service Coverage Ratio (DSCR) measures the income-generating capacity of the property itself and the property’s ability to cover the monthly PITIA payments. A higher DSCR signals that the property is producing enough cash flow to cover its monthly obligations, making default less likely from an operational standpoint. Unlike LTV and FICO however, this metric just covers a risk of default and doesn’t measure the secondary risk considerations of preventing losses in case of default, such as through the ability to recover payment through foreclosure (LTV ratio) and personal recourse guarantee (FICO score).
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The qualifying credit score is a key factor for the DSCR Loan Terms and qualification. At the beginning of nearly every DSCR Loan process, the lender “pulls” a credit report, which is a report on the credit history and usage of an individual(s) that will be guaranteeing the loan. A credit score is a single number (ranging from ~300 to ~850) that serves a “prediction of your credit behavior, such as how likely you are to pay a loan back on time, based on information from your credit reports.” A credit report also will generally include three different scores from each of the three major nationwide credit reporting bureaus: Equifax®, Experian™ and TransUnion®. DSCR Lenders will typically use the median score of these three (i.e. the “middle number”) as the official number used from a report for loan qualification and pricing. For example, if a credit report shows three scores; 745, 755, and 702, then the score used will be 745, or the number that is in the middle, neither the highest nor lowest).
FICO score is determined by assessing credit data in the following five weighted categories: payment history (35%), credit utilization (30%), length of borrower credit history (15%), types of credit in use (10%) and new credit accounts (10%). While these aspects and details are also used in the qualification and underwriting process for DSCR Loans (like specific rules around number of late payments on mortgage loans or ages and types of specific charge-offs and collections), the credit score number itself plays a large role in and of itself.
One important nuance that real estate investors using DSCR loans (or any mortgage loan for real estate) is that credit scores used by mortgage lenders are different than normal consumer credit reports. These mortgage lender credit scores are weighted a bit more heavily toward real estate credit, taking things like other mortgage debt more into account. While DSCR Lenders are looking at an overall history and track record of paying debts, it is especially important to see responsible and reliable payment of mortgage loans in particular.
The minimum credit score required for a DSCR Loan will vary from lender to lender. But in general, the minimum qualifying credit score for a DSCR Loan is going to be between 620 and 680, with most common DSCR lender minimum credit scores of 640 or 660. These minimums may also adjust in certain cases, such as requiring higher minimums for high-leverage loans (i.e. 80.0% LTVs) or riskier deals where the DSCR ratio is low or the property is a short term rental in a rural vacation market. But in general, a median credit score above these minimums means you are eligible for a DSCR loan, and almost certainly eligible in near-100% of cases with a credit score of 680 or higher. Conversely, with a credit score of less than 640, and definitely of less than 620, you will likely be ineligible until the score can be improved through time and credit repair.
While the credit score utilized by DSCR Lenders is the median number of the three scores generated by each of the major bureaus, most lenders will use what can be referred to as “buckets” or ranges of scores to determine the impact of credit score on DSCR Loan rates and terms. This essentially means that your credit score will fall into a specific range, in which it will be treated the same as the other scores in that specific range, even if not exactly the same. For example, DSCR Lenders will often group scores into “buckets” such as 640-659, 660-679, 680-699, 700-719, 720-739, 740-759, 760+. Typically, these buckets will be in groups of 20 and at the upper limit, treat anything above a certain number (often 760 or 780) the same, as the best possible score. This means in practice for example that a 685 and 699 credit score will be treated the same, as will a 765 and 800 score.
Generally, DSCR Loans will have a singular credit score as the official “qualifying score,” used for qualification and pricing, even when the official “borrower” on the loan is an entity (such as an LLC) that has multiple owners, and the DSCR Loan itself has multiple guarantors (i.e. individuals signing loan documents and personal guarantees). DSCR Lenders generally require entity owners with 25% or greater ownership (and at least 50% aggregate ownership) to be recourse guarantors. All guarantors have their credit report pulled and each individual’s credit history is utilized in the qualification process (in terms of both score and other factors such as mortgage lates, credit events, etc.).
One important fact about how credit scores are used by DSCR Lenders for pricing and qualification is that only one score is used even in cases of multiple guarantors and multiple reports pulled. This holds true even though the guarantees are “joint and several,” meaning in cases of multiple guarantors, each individual guarantor is fully and 100% responsible for the remaining amount owed For cases of entity borrowers when the ownership percentages have a clear majority owner, i.e. one individual has the highest percentage of ownership (such as 75/25 or 51/49 split), then the median score of the majority owner guarantor will be used. In these cases, the score of the lowest minority owner will not be used, and DSCR Lenders are pretty universal in this treatment for these scenarios (i.e. all lenders will use the score of the highest percentage owner for qualifying and pricing).
The important differences in treatment among different DSCR Lenders come into play in cases where there is equal ownership of the borrowing entity such as two 50/50 owners (common in real estate investing). In these cases, some lenders will use the lower of the two median scores while some will use the higher of the two median scores. This can have a huge effect on interest rate and terms, and even qualification. For example, with two 50/50 LLC owners, one with a 650 credit score and one with a 750 credit score, the effect on rate can be very significant if one lender uses 650 and another uses 750. While there is significant variance among DSCR Lenders on using the lower or higher, generally the lender will use the median score of one of the individual owners (guarantors), either the higher one or the lower one. Any other methodologies such as averaging out scores or something similar are not known to be used by any DSCR Lender. For investors utilizing LLCs and multiple-owner strategies, it is paramount to understand the lender’s methodology for qualification score determination in these cases in order to secure the best options for a DSCR Loan!
Why would some DSCR Lenders use the lower of two scores for 50/50 owners? While this makes sense on the surface as lenders just “being conservative” on risk, since these are “joint and several” guarantees, it logically doesn’t make sense to qualify with the lower score, since with joint and several guarantees, the DSCR Lender has full 100% recourse from all guarantors.
To illustrate the logic (or lack thereof), consider two examples:
Which is riskier for the lender? By definition, it has to be Example 1, since in each scenario, the lender has full 100% recourse on an individual with a 740 credit score, but in Example 2, the lender has an extra or bonus recourse guarantor with a 650 credit score, that has no effect on the ability or size of recourse for the other individual. So while it’s not as valuable to have a recourse guarantor with poor credit, it is better than nothing (i.e. no extra guarantor to go after in Example 1). However, seemingly illogically, DSCR Lenders that use the lower of two credit scores to qualify instead of the higher of two (for 50/50 scenarios) will give worse rates and terms to Example 2 and classify it as higher risk, when it should be lower risk!
So what explains this seemingly illogical treatment for choosing the lower score for qualifying credit score by some DSCR Lenders? As is often the case in real estate lending, when something doesn’t make sense on the surface, the answer is that it’s likely a policy built around avoiding fraud. This is probably the reason for this treatment from some lenders, as the use of “straw borrowers” in real estate investing is a common problem.
In real estate, the term “straw borrower,” generally refers to a borrower or owner of an LLC that is used for qualification purposes but is not the real owner or investor. An example would be an investor with poor credit utilizing an LLC structure to give majority ownership on paper to someone uninvolved in the investment, but with a high credit score. After qualification, they revert the ownership back to the true owner. Another scheme could include an investor setting up an uninvolved family member (like a grandparent or spouse) with good credit to qualify as a 51% owner, and then restructure the LLC post-close to revert full ownership back to the real investor. In these cases, the lender would qualify the loan based on credit of an uninvolved “fake” sponsor and grant better terms to the real investor behind the loan.
Straw borrower schemes can be hard for DSCR Lenders to identify since defining a “straw borrower” can be both a grey area and hard to fully confirm. The response of some lenders will be to accept the mispricing of some loans (through using the lower of two credit scores for qualification) to prevent inadvertently making loans to straw borrowers.
Q: What is a Straw Borrower in Real Estate?
A: A Straw Borrower is an individual who uses their name and credit to obtain a mortgage for someone else who cannot qualify. Because the borrower has no intention of actually owning the property or making payments, this practice is classified as mortgage fraud.
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The Loan-To-Value (“LTV”) ratio is also a huge factor in determining the rates and terms offered by DSCR Lenders, generally commanding the largest effect on pricing. LTV is so important since it is the primary measurement of the ultimate risk for lenders: whether they will lose money on a loan or not. While the risk of default by a borrower is the main thing that a lender wants to evaluate (and avoid), the ultimate risk is a level further, that the lender will not be made whole, or in the case of default, by recouping the money owed through foreclosure. While not ideal, foreclosure on a rental property is not the end of the world for a DSCR Lender; the fact that the loan is secured by a valuable asset mitigates the consequences of default.
Since almost all DSCR loans are secured by a property that is at least 20% higher in value than the loan balance (80.0% LTV = Loan Amount is 80% of the property value), assuming the valuation is accurate, there is always a fair amount of difference between the balance owed and what the property could command in proceeds if the lender has to foreclose and sell it. Of course, this relies on caveats and assumptions; the difference is between loan amount and value, and accrued interest and fees from default and foreclosure costs will eat into that difference. Additionally, property values can decline (even if historically most properties increase in value) and properties securing loans in default are way more likely to have lost value, either through market forces or mismanagement / poor maintenance or a combination of both. Further, values at loan close can be subjective, relying primarily on appraisals, which at the end of the day, are still more art than exact science, and especially for refinance transactions, are based on an appraiser’s judgment, not an actual market transaction.
However, with the caveats aside, the LTV ratio is a strong indicator of the likelihood of the lender to mitigate the risk of losing money in the event of a default and subsequent foreclosure sale. And the measurement is pretty straightforward, simply the higher the LTV ratio, the higher the risk, and the lower the LTV, the lower the risk. This is because the lower the LTV ratio, the higher the difference between the value of the property and the initial loan balance, so there is more dollar value “cushion” needed to cover any loss in value as well as any accrued interest, fees and other costs involved with a foreclosure and sale.
In fact, at low enough LTVs (like 60.0% or below), there is so much “cushion” that often the lender will actually stand to even make more money in the case of default and foreclosure, since the proceeds of a sale would likely be significantly more than the amount owed, even when including accrued interest and fees. Note that if the lender “makes money” on the foreclosure, they get to keep it as profit; the difference doesn’t go back to the borrower! (However, the lender can’t foreclose without a default, so there is no risk of a lender proactively seizing a property if payments are made on time).
Similar to how DSCR Lenders evaluate credit score, LTV ratios are evaluated using “buckets,” typically in 5% increments. So a typical DSCR lender’s risk evaluation will have different LTV buckets of 75.01-80%, 70.01-75%, 65.01-70%, 60.01-65%, 55.01-60%, 50.01-55% and <=50%. Since investors usually want to maximize leverage, they will typically choose the option at the top of the range, so most DSCR Loans end up having LTV ratios in the exact 5% increments, such as 70.0%, 75.0% or 80.0% exactly.
Keeping everything else equal, a set of DSCR Loan quotes with different LTVs can have significantly different rates, so an option at maximum LTV (typically 80.0%) can have quite a different rate (such as even a full 1% or 2% higher!) than an equivalent loan at a much lower 60.0% LTV. Different investors may have different leverage strategies and risk tolerances, and the flexibility on the LTV spectrum is a nice aspect of DSCR Loans that allow investors lots of options.
The Debt Service Coverage Ratio, or DSCR, is the third of the three core metrics used in underwriting DSCR loans. Despite giving this loan type its name, DSCR is arguably not the most important factor when it comes to pricing or eligibility. In most cases, qualifying credit score (FICO) and LTV ratio carry more weight in the determination of what rates and terms are offered, since both these factors also cover potential post-default loss recovery. Still, DSCR remains a top-three factor because it evaluates a key aspect of the risk of the loan and the primary risk: borrower default.
While LTV helps the lender estimate how much they could recover in a foreclosure, and FICO helps them evaluate whether a borrower has a history of paying debts, DSCR looks at the property’s ability to cover the monthly PITIA payments as a self-sustaining income source. While DSCR Loans are structured to protect the lender if things go wrong through foreclosure (measured by LTV) and sometimes even personal recourse (measured by FICO), the DSCR ratio is the central measure lenders use to evaluate the risk that it comes to that point; i.e. the stronger the DSCR ratio, the less likely a borrower default will occur and actions such as foreclosure or personal recourse will be necessary.
As a refresher, the DSCR formula used by DSCR Loan lenders (not to be confused with the formula used by CRE or Business lenders) is simple and specific: DSCR = Rental Income ÷ PITIA, where PITIA includes Principal, Interest, Taxes, Insurance, and in some cases HOA dues or assessments. A DSCR of 1.00x means the property brings in just enough rent to cover the monthly payment, a “break-even.” A DSCR ratio below 1.00x indicates that the property has negative cash flow, and the borrower will need to make up the shortfall between rents and PITIA with personal funds. Of course, a DSCR ratio above 1.00x indicates positive cash flow, where the property is profitable, generating excess rental income above the monthly payment owed.
Lenders use defined “buckets” to evaluate DSCR just like for FICO and LTV, which influence both pricing and eligibility. The most common DSCR tiers are: < 0.75x (sometimes, called “no ratio”), 0.75x – 0.99x, 1.00x – 1.14x, 1.15x – 1.24x and 1.25x+.
Many DSCR Lenders only begin quoting or approving loans starting in the 1.00x–1.14x range (i.e. carry a 1.00x minimum). Some will allow deals with DSCRs in the 0.75x–0.99x range (often at reduced LTVs and with pricing hits), while the <0.75x tier is typically considered "no ratio" DSCR Loans, offered only by a handful of DSCR Lenders at higher rates with stricter requirements (typically much lower LTV maximums). A few DSCR Lenders may also offer finer-grained pricing buckets above 1.25x, such as 1.25x–1.49x and 1.50x+, although these are less common.
Q: What is a “no ratio” DSCR loan?
A: A “no ratio” DSCR loan refers to a DSCR loan with a debt service coverage ratio below 0.75x, meaning the property’s rents cover less than 75% of the monthly PITIA payment. Some DSCR Lenders offer these loans as part of their standard programs, but they typically come with higher rates, lower LTVs and stricter borrower requirements.
A “good DSCR ratio” for a DSCR Loan is dependent on many factors, as the flexibility and range of DSCR Loans means financing for a large variety of real estate investing strategies and scenarios. Commonly, a “good DSCR ratio” is 1.25x or higher, as this indicates comfortably positive cash flow, with a healthy profit margin and room to still cover payments in case of issues (such as vacancies or expenses for unexpected repairs). The 1.25x DSCR ratio is also a common real estate lending industry standard “floor” or DSCR ratio minimum for commercial real estate lenders and business lenders, although this floor is not applicable for DSCR Loans. There can be many reasons why residential real estate investors can find success with properties with DSCR ratios under the 1.25x barrier. Lending on these properties can make sense for a DSCR Lender from a risk-reward standpoint too, especially when other aspects of the specific loan scenario are strong.
It’s also important to remember that DSCR is based on the lender’s underwritten revenue, which can be different among lenders for some scenarios, particularly in less vanilla deals like for short term rentals or properties with significantly above- or below-market rents, where lender judgment and methodology can vary. This means two lenders can calculate different DSCRs for the same deal, which can lead to different pricing tiers or even different eligibility outcomes. Further, expenses are limited to PITIA, and the DSCR Lender’s formula doesn’t include other typical expenses like landscaping or management costs, that smart investors should factor into their own personal calculations.
The DSCR ratio gives the lender one clear signal: How reliant is this loan on the borrower’s personal resources? (or more accurately, how strong is the likelihood that the individual’s personal resources won’t be needed to cover the monthly payments) The lower the DSCR ratio, the more likely the investor will have to step in to make PITIA payments, a key indicator of a higher risk of default. The higher the DSCR ratio, the more self-sustaining the property and the likelihood the borrower would have to tap personal funds for PITIA is much lower, indicating a much lower risk of default.
The DSCR Ratio bucket a DSCR Loan falls into has a smaller effect on overall interest rate and loan terms than which LTV or FICO bucket the loan lands in. Generally, borrowers will get slightly better terms (lower rate and/or fees) with DSCRs above 1.15x or 1.25x, but the difference isn’t usually very large (generally around a rate improvement of only 0.25% or so). Conversely, with DSCR ratio buckets under 1.00x, the “penalties” are pretty harsh, with lenders often demanding much higher rates or fees for sub-1.00x DSCR Loans to compensate for the heightened risk. When generating terms for DSCR Loans with DSCR ratios under 1.00x, whether in the 0.75x-0.99x range or the “no ratio” DSCR Loans with DSCR ratios under 0.75x, the lender generally compensates with sharper LTV restrictions (such as maximum LTVs for these scenarios around 65.0% vs. 80.0% otherwise) and more moderate hits to pricing.
At first glance, the term “No Ratio DSCR Loan” sounds like a contradiction. After all, the namesake of a DSCR Loan is the Debt Service Coverage Ratio, so how can DSCR Loans exist with no DSCR ratios?
In practice, “No Ratio” simply refers to DSCR loans where the underwritten DSCR falls below 0.75x. These are loans where, on paper, the rental income not only doesn’t fully cover the monthly debt service, it doesn’t come close, with rents 25% or more below the PITIA. And yet, some lenders are still willing to fund these deals and these scenarios can actually make sense for some real estate investors and DSCR Lenders alike. However, this raises an obvious question for investors new to DSCR lending:
Why would anyone want a loan on a property that’s losing money every month?
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Well, there are a handful of reasons that lead real estate investors to pursue these investments (i.e. negative cash flow properties) and seek financing. While not common, and definitely higher risk, here a few cases where “no ratio” DSCR Loans can make sense.
Many real estate investors have generational wealth through long-term ownership of residential real estate in certain markets that have experienced significant appreciation over time. Classic examples include supply-constrained, high-demand areas such as Southern California and New York City. For example, SFRs in southern California have appreciated on average a whopping $689,174 or 367.5% from 1990 to 2024. Properties that have outsized appreciation can more than counteract cash flow losses in some markets.
Most investors would trade major appreciation in equity value (remember, when using leverage, investors get 100% of the gains even if the majority of the purchase is covered by a lender; i.e. only provide a 20% down payment) for minor negative cash flow. The math can work in many markets. For example, if a property appreciates $200,000 in five years but it lost $10,000 each year, the investor still comes out $150,000 ahead! Obviously past performance is no guarantee of future performance, and there’s no certainty these markets, or any markets, will continue to appreciate so heavily that it makes negative cash flow worth it, but many investors have successfully made this bet and continue to do so; and some DSCR Lenders are there to accommodate them.
Another common real estate strategy is for investors to target properties that are poorly managed or not economically optimized, and add value through better operating ability and higher rents. This is similar, but different to the “fix and flip” or “BRRRR” strategies where the value-add is based on renovations and physical improvements. Instead, this strategy creates value through better management such as by raising rents to market rates if the tenants are paying significantly less than market or switching leasing strategy from long-term rentals to a more lucrative STR or “mid-term rental” approach.
While some DSCR Lenders have begun to adapt guidelines and qualification standards for these situations – giving “credit” for the DSCR ratio on the market rents that the new buyer (and loan borrower) will presumably lease the property at – many DSCR Lenders will still require the DSCR ratio calculation to use the below-market in-place rents if there is still some time left on the lease at acquisition. An example would be a buyer purchasing a property with a market rent of $3,000 per month with a tenant in place that’s paying only $1,500 per month, with a lease expiration a few months after the close date of the loan. In this case, most DSCR Lenders will calculate the DSCR ratio conservatively, using the $1,500 in-place rents instead of the $3,000 market rent, even though that low amount will only be in place for a few months out of a 360-month loan term.
In this case, the DSCR Loan would be “sub-1.00x” or “no ratio” on paper but in reality, likely an investment and loan that will cash flow for the vast majority of the term.
As short term rentals have become more established, especially among DSCR Lenders, there exist plenty of options for real estate investors looking to finance an STR to qualify with the STR-based income projections, through sources like AirDNA. However, in the past, and still currently in 2025 with some more slow-adapting DSCR Lenders, the DSCR ratio qualification for a short term rental without 12-months of operating history might still be qualified and calculated based on the long-term market rents, even if the property is being used as a short term rental.
The general rule of thumb is that these long-term rents are about half as much as the property’s short-term rental earning potential, so DSCR Loans qualified in this fashion will have much lower rents and DSCR ratios than their true potential or even actual use. As such, in these cases, these STR DSCR Loans may look “no ratio” or money-losing “on paper,” however as STRs, they will not actually be money-losers.
This is becoming less of a prevalent portion of sub-1.00x DSCR Loans by 2025 as more lenders adapt to qualifying STRs as STRs, however it still exists and is a classic example of no-ratio DSCR Loans that have been historically originated.
The tax code and its friendliness to real estate investing as a way to offset income is another reason that many people invest in real estate. High earners can sometimes invest in real estate properties that are not cash flowing to start or to take advantage of favorable tax treatments such as the short-term rental “loophole” to realize tax savings well in excess of minor monthly cash flow losses on the properties themselves. In these cases, the borrowers will have plenty of cash and liquid assets to plug the difference in a sub-1.00x DSCR deal and proceed anyway because the property helps in their overall financial picture.
Additionally, it’s always important to remember that the vast majority of DSCR Loans are fixed-rate for thirty years, so these properties may have negative cash flow in years one or two, when the tax benefits are taken, but over time, as rents rise and the fixed debt service payment stays the same, the properties can ascend to positive DSCR ratios and start earning cash flow after a couple years. In these cases, it’s a win-win for the investor, making money in aggregate year over year, as positive cash flows later in the term outweigh any early-term losses. This is particularly positive for some investors that use tax strategies such as bonus depreciation to save six figures of taxes in the year upon purchase, which can dwarf the operating cash flow losses early on.
A final reason why a sub-1.00x or “no ratio” DSCR Loan may make sense is that certain real estate investors have a true market edge where the investment makes sense for them but couldn’t easily be replicated. Maybe they know the pulse of a specific smaller vacation market or they have ancillary businesses or relationships that make a lot of money from STR guests besides just actual rents. An example could be if an investor is using a ski-town property as a “loss leader” but steers guests towards renting nearby snowmobiles or mountain tours that more than make up for the missing rents.
In these cases, the DSCR lender must underwrite and calculate the DSCR ratio based on market, or what the DSCR lender would reasonably be expected to earn if they foreclose on the property and operate it (or sell it to someone to operate it) without this specific “edge.” Thus, these loans will likely look sub-1.00x on paper but still make sense for the investor who is making money in real life. Because some DSCR Lenders are willing to have sub-1.00x DSCR Loan options and lend in these situations while still underwriting effectively, these loans can and do happen and real estate investors can successfully find financing for their niche strategies.
While many DSCR Lenders won’t touch a deal with a DSCR below 0.75x, a small group of lenders will in fact do these so-called “no ratio” DSCR Loans. These will typically be done to account for the above situations which make sense from both a borrower and lender perspective, even if it doesn’t appear so on paper.
Additionally, when it comes to lending on real estate, a low enough LTV ratio can cure many ills, and make any deal work. Why? Because, the lender’s main recourse in case of a default – or if the borrower doesn’t make payments, is to take ownership of the property. And the key here is that the lender gets the property and all its value, not just the specific amount owed to get paid back. So once the LTV ratio is low enough, then in many cases the lender might even prefer a default and ownership of the property instead of holding the loan!
To illustrate, if a property is worth $1,000,000 and the loan has a balance of $500,000 for a 50.0% LTV – then the lender would probably rather have a million dollar property (asset) to sell than get paid back the $500,000, even with interest. If they can make $900,000 after foreclosure and selling costs, they make $400,000 on the defaulted deal.
While DSCR Lenders don’t typically make loans with this in mind, one of the ways that “no ratio” DSCR Loans can work for the lender is that there will be relatively low LTV limits for these loans, typically low enough so that even if the DSCR Lender is skeptical of a borrower’s plan to invest in a property set to lose significant cash flow every month–they know they may even come out ahead if the borrower can’t make it work, so all parties are good to go!
In summary, the qualifying credit score (FICO), loan-to-value ratio (LTV) and debt-service-coverage-ratio (DSCR) are the three most impactful factors in the investor’s control (i.e. not based on overall market rates) for getting the best terms – lowest combination of interest rate and closing fee. They work in conjunction with each other and DSCR loans are often great for real estate investors because specific loans can mix and match based on preference, for example, a deal with a low DSCR ratio can still get great pricing with a low LTV, as the low leverage point can counteract the negative effects of a low or negatively projected cash flow.
Simply put: real estate investors using DSCR Loans should aim for low LTVs, high credit scores and high DSCR ratios to get the best rates and terms. While these factors make up the majority of what rate and terms an investor will get – there are several other factors that can be very impactful as well, which we will cover in the next section.
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