Last updated: April 15, 2024
Can you get a DSCR loan with no down payment?
There are no DSCR loan programs that allow you to avoid down payment. The largest and most competitive institutional investors that buy DSCR loans allow a maximum 80% LTV in their strict and standardized guidelines. That means you would be responsible for a 20% down payment on a purchase using a DSCR loan.
The correlation between down payment and default rate has been studied extensively. Housing economists, institutional lenders, and institutional rental property investors seem to agree that 70% LTV (30% down payment) is an ideal target.
The reason why no down payment loans are not available is because of the risk of negative equity. At 0% down payment, you start with 0% equity in the home. Equity is the difference between market value and loan amount. If the market value of your home goes down, and you need to sell the home, you would need to bring cash to the closing table. This very real risk can be eye-opening with an example.:
- Purchase price: $200,000
- Loan amount: $200,000
- Market value after 10% downturn: $180,000
- Equity: -$20,000
- Closing costs to sell: $15,000
- Cash from borrower at settlement: $35,000
When the scenario above plays out, many borrowers decide to walk away and let the lender foreclose on the house.
A no down payment loan in a rising market can perform well and quickly from from 100% LTV at origination to a safe CLTV (current loan to value). Let's take a look:
- Purchase price: $200,000
- Loan amount: $200,000
- Market value after 10% appreciation: $220000
- Equity: $20,000
- Closing costs to sell: $15,000
- Cash to borrower at settlement: $5,000
When taking on high LTV debt, it's important to understand how your amortization schedule affects that rate at which you accumulate equity in an event your home value does not appreciate. A $200,000 property with a $200,000 loan on amortizing over 30 years will provide you with just $10,765.13 of equity by the end of year 5. A 15 year amortization schedule will provide you with $43,808.16 of equity over the same timeline. The tradeoff, of course, is that the monthly payment will be $455.59 higher in the 15 year amortization schedule.
DSCR loan liquidity verification
For purchase transactions using a DSCR loan, DSCR lenders need to verify that you have enough liquidity to cover the following:
- down payment
- closing costs
- 9 months of mortgage payments ("reserves")
For liquidity verification, you can provide:
- 2 most recent business bank statements, and/or
- 2 most recent personal bank statements, and/or
- 2 most recent brokerage account statements, and/or
- 2 most recent retirement account statements, and/or
- 1031 exchange escrow statement
You do not need to move funds from any account and you do not need a business bank account.
What is the minimum down payment for a DSCR loan?
We have seen some DSCR lenders advertise as low as 15% down (85% LTV), however, this is not a healthy, competitive or safe option for real estate investors. In practice, it is very difficult to get a DSCR loan with a down payment below 20% (80% LTV). We have received consistent feedback that it is extremely difficult and time consuming to get to the closing table with a 15% down DSCR loan term sheet. It's important to point out that the higher the LTV, the higher the rate.
DSCR Loan Rates by LTV
| LTV | Credit Spread |
|---|---|
| 50 | 3.25% |
| 55 | 3.3% |
| 60 | 3.35% |
| 65 | 3.375% |
| 70 | 3.4% |
| 75 | 3.5% |
| 80 | 4.0% |
The credit spread in the table above may vary based on DSCR lender, prepayment penalty, number of units of the subject property, and market pricing demanded by investors that buy DSCR loans.
The credit spread is often referred to as the "risk premium" that institutional DSCR loan investors demand to receive above the benchmark "risk free" rate, which is typically the 5 Year US Treasury. Institutions that buy DSCR loans view higher LTV as riskier because the borrower has less equity in the property to provide protection in the event home prices decline and/or the property needs to be sold or foreclosed on.
Learn more about DSCR loan interest rates.
What are the risks of high LTV DSCR loans?
💸 negative cash flow -- consistently monthly losses, high financial stress📉 high default risk -- inability to meet debt obligations💸 bankruptcy, foreclosure -- personal guarantee required
DSCR loan LTV insights
Most DSCR lenders require a minimum DSCR of 1.0. That means the property generates exactly enough rent to pay the monthly mortgage payment (principal, interest, taxes, insurance). If the property requires maintenance or administrative work, that means you'll be losing money.
A DSCR of 1.1 means you generate a 10% cash flow margin above your monthly mortgage payment. Borrowers with credit scores of 720 or higher will qualify for the most competitive rate when their rental property has a DSCR of 1.1 or higher.
A DSCR of 1.2 means you will generate a 20% cash flow margin and may be required for borrowers with credit scores that are below 720 or 700 (depends on the program).
Interest rate directly affects DSCR. The higher the interest rate, the lower the DSCR. In an elevated interest rate environment, in many markets, it is common for the DSCR to be too low at max LTV.
| DSCR | Credit score | Rate |
|---|---|---|
| 1.0 | 700+ | Uncompetitive |
| 1.1 | 720+ | Competitive |
| 1.2 | 680+ | Competitive |
