If you have a cash-flowing rental property, there may be no point in verifying personal income if you want to refinance. A Debt Service Coverage Ratio (DSCR) refinance loan approves a rate/term or cash-out refinance based on the property’s cash flow, not your employment income.
This refinance loan opens up opportunities for real estate investors, especially those who are self-employed, full-time investors, or have hard-to-document personal income.
Here’s how to put a DSCR refinance to work for you.
1. Replace short-term financing
If you’re a BRRRR investor (buy, rehab, rent, refi, repeat), you already know you must get short-term financing for the rehab stage if you don’t have cash.
But short-term loans have high rates and short fuses. You need to replace them with a long-term fixed loan to truly stabilize the property.
Once you’ve owned the property 3-6 months, and found a renter, you may qualify for a refinance based on the new value. A 30-year fixed DSCR loan can pay off a hard-money loan and even let you tap into additional equity for the next deal.
There are even some lenders who will allow a DSCR refinance with no seasoning.
2. Get a better rate
No matter what kind of loan you have on your rental currently, a DSCR loan can replace it. In some cases, you can drop your rate and payment to increase cash flow.
For example, if you have a loan at 10%, and today’s DSCR rates are 8%-9% as an example, you could get a lower payment. You could even drop your rate and take additional cash out simultaneously.
3. Reduce or increase the term of the loan
Depending on your goals, you may want to change the term of the loan.
Lengthen the term: To improve cash flow, you could increase your loan term. You pay more interest overall, but the monthly payment goes down. For example, you received a 30-year DSCR loan two years ago. But you discover a new 40-year DSCR option, which reduces your payment by $150 per month. The lower payment provides more cushion for this property and your portfolio overall.
Shorten the term: You could go the other way and refinance into a 15-year fixed DSCR loan. This would decrease cash flow on the property, but you would pay less interest and have a free-and-clear property sooner.
4. Go interest-only
Many lenders offer interest-only DSCR loans, which likely offer the lowest payment and highest cash flow of any DSCR loan.
If you’re paying a fully-amortized payment, you may be able to improve cash flow by refinancing into an interest-only loan. Below you can see the difference “IO” can make, especially if you’re below the standard ratio requirement of about 1.0 (meaning the property breaks even each month).
30-Year FixedInterest-OnlyLoan amount$400,000$400,000Interest rate*7.5%7.75%Payment$2,797$2,583 (IO)Taxes, insurance, HOA$500$500Full payment$3,297$3,083Rental income$3,100$3,100DSCR0.94x1.01x
*Interest rate is for example purposes only and may not be available.
5. Finance another property purchase
So far we’ve been talking about improving cash flow on a property, but what about expanding your portfolio with a DSCR refinance?
Property values are climbing, and you may be able to access a rental property’s trapped equity with a DSCR cash-out loan.
For example, you own a rental property worth $350,000 but only owe $175,000. You might qualify for a new DSCR loan at 75% LTV for around $260,000. After closing costs, you have nearly $80,000 to put toward another property.
6. Complete improvements
To rent a home for top dollar, it’s got to be dialed in with modern finishes. These improvements attract the best rental candidates. The only problem is that remodeling a home can be spendy.
With a DSCR refinance, you can pull cash out of the property you want to improve or another rental property. Fix up the home between renters, then increase rents when repairs are complete.
Often, you can increase cash flow by financing repairs, rather than letting the property remain outdated.
7. Consolidate property liens or other debt
A DSCR refinance can tidy up your debt stack on a property.
For example, you have the typical first mortgage. But to finance improvements, perhaps you pulled a home equity line from the rental or another property. In addition, you financed other repairs via credit card or separate business loan.
A DSCR refinance can wrap up all those loans into one fixed-rate mortgage with one payment, freeing up mind space for other ventures.
8. Leverage increased property value
Property values have soared, even as rates have climbed since 2022. Even if you purchased a rental property as little as a year ago, it may have gone up in value enough to tap into equity. Use the DSCR refinance funds to fix up the property or invest in another project.
9. Replace an adjustable-rate mortgage
Many investors like the low rate an adjustable mortgage offers but are uncomfortable with the potential payment increase later. If you have an adjustable-rate mortgage (ARM) on a rental home, it could be a good idea to get a 30-year or even 40-year fixed DSCR refinance to lock in your payment.
How will you use a DSCR refinance?
These are just a few ways you can use the popular DSCR loan to refinance a rental property to achieve various goals.
See if you’re eligible to refinance with DSCR so you can be ready to take advantage of the next opportunity.
