With a Debt Service Coverage Ratio (DSCR) loan, you can refinance your rental property – and even take cash out – without supplying personal income information.
Investors and self-employed individuals have a hard time qualifying for conventional loans from Fannie Mae and Freddie Mac. Documenting personal income is too onerous, and rates are sky-high.
That’s where a DSCR loan comes in. Whether you want to refinance a recent rehab project into a long-term loan, or take cash out to expand your portfolio, a DSCR cash-out refinance has you covered.
How does a DSCR loan work?
Lenders can approve a loan based on the property’s income instead of your personal income.
They rely on the debt service coverage ratio, or DSCR, for qualification. DSCR is the comparison between a property’s income and the full payment.
DSCR = Income / Payment
For example, a property has a $1,500 payment – including principal, interest, taxes, insurance, and HOA. Its rental income is $2,000 per month. It has a DSCR of 1.33. A DSCR over 1.0 can often be approved, however, some lenders require 1.1-1.5 depending on the property and borrower characteristics.
In short, if your property will cash flow after the cash-out refinance, you may be approved.
For a complete overview of DSCR loans, see our guide.
Why real estate investors like DSCR cash-out refinances
There are plenty of ways investors are leveraging this program to improve their portfolios.
Replace other financing: Use a 30-year fixed DSCR cash-out or no-cash-out refinance to replace short-term financing like a fix-and-flip loan.
Finance another purchase: Tap into a rental property’s equity for the down payment on a new property.
Rehab another property: Get cash out of an existing home to rehab another property in your portfolio.
Get a better rate: The property might be financed at a higher rate currently. Perhaps you used a home equity line, business loan, or other high-rate loan. If today’s DSCR rates are lower, you could get a lower rate while taking cash out.
DSCR refi example
As-repaired value (ARV)$250,000 New DSCR loan$187,500 Closing costs$9,000 Existing liens$135,000 Net cash out$43,500 New payment$1,700 Rent$2,000 DSCR1.18
DSCR cash-out refinance guidelines
Here are general guidelines you can expect to meet when using a DSCR loan for cash out.
Loan-to-value (LTV): 75% cash out; 80% rate/term
DSCR: 1.0-1.25 minimum depending on lender
Personal income documentation: None
Minimum credit score: 640-660
Occupancy: Non-owner-occupied only. No primary residences
Property type: Single-family, 1-4 unit, 5+ unit commercial, condo
Property use: Long- and short-term rentals
Proof of value-add: If you recently purchased the property, the lender will verify you added improvements to increase the value
Lease: You may need to provide proof that it’s rented and monthly income
Tax, insurance, HOA: Proof of these costs to calculate DSCR
Loan types available: 30-year fixed, adjustable rate
Min/Max loan: Typical minimum loan amount of $75,000-$100,000. Maximum loan could be in the millions assuming it cash flows
Max properties owned: Most lenders do not cap the number of properties you can own
Prepay penalty: You might opt for a prepay penalty to reduce your rate
Closing in LLC: Most DSCR lenders allow you to close in the name of an LLC
DSCR cash-out refinance seasoning
The typical DSCR cash-out refinance seasoning requirement for most lenders is 3-6 months.
This means that you must have purchased the home at least 3-6 months prior to the refinance. You may also have to prove that you completed improvements.
Seasoning requirements apply if you are seeking a new loan based on a higher value than the purchase price.
However, here are ways around these rules.
No-seasoning cash-out DSCR: A few DSCR lenders will allow a cash-out refinance any time after purchase as long as you can document improvements and that it’s leased.
Learn more: No-Seasoning DSCR Cash-Out Refinance.
Delayed financing: In some cases, you can refinance immediately for around 80% of the original purchase price if you paid cash and you are simply reimbursing yourself. However, your LTV can’t be based on a higher as-repaired value.
DSCR cash-out refinance rates
Cash-out rates will be higher than standard standard DSCR rates. These loans are generally higher risk than a purchase loan, which translates to the rate.
However, rates may not be as high as other options. Comparing a DSCR loan to a conventional cash-out, you could very well do better.
Here are fees Fannie Mae would add to an investment property cash-out at 75% LTV and 720 credit score.
Cash-out 75% LTV: +2.0% fee
Investment property: +2.125% fee
This 4.125% fee add-on would equate to a $10,300 fee on a $250,000 loan. Even if you could increase your rate in lieu of the fee (which most lenders could not do with today’s pricing), you would end up at a rate near 10%.
Why go conventional when you can get a no-income-verification DSCR loan at likely a lower rate?
DSCR refinance closing costs
Fees will vary depending on lender. Your biggest cost might be points. Most DSCR lenders charge 1-4 points depending on the property and borrower. Your lender could charge different or additional fees compared to the below list.
Points1-4Underwriting$500-$1,000Appraisal$500-$1,000Title$1,000+Recording$150Credit report, flood cert, other standard checks$200Escrow$500-$1,000
Refinancing an existing DSCR loan
You can use a DSCR cash-out refinance to replace an existing DSCR loan. Perhaps the property cash flows better now, or you have more experience or a better FICO score. Any of these factors may improve your rate.
Check your prepayment penalty
Be sure to check your existing loan’s prepayment penalty. Many non-QM loans come with penalties of up to 3% of the loan amount for refinancing within 1-3 years. If you have a prepay penalty, make sure the refinance still pencils out despite paying this extra fee to the former lender.
DSCR cash-out alternatives
Bank statement loans: These loans use bank deposits to prove income rather than tax returns. They are available on investment properties from some lenders
Private lending: Some banks will offer your business a loan. These often don’t have seasoning requirements.
Business cash flow loan: Services like Nectar offer your overall business a source of financing as long as your business is profitable and is looking to buy or improve additional cash-flowing assets.
Home equity line of credit: If you have enough equity in your primary home, you could use it as a source of additional funding instead of a new loan on the property. However, this encumbers your personal assets with business assets, which isn’t always a good idea. You could also get a HELOC on an investment property.
A DSCR cash-out refinance is a great tool for the right investor
In the hands of the right investor profile, a DSCR cash-out refinance is a powerful tool to improve, stabilize, or expand a portfolio.
