Debt Service Coverage Ratio (DSCR) loans are a type of financing used to purchase or refinance income-producing properties like buy-to-let investments or commercial real estate. With a DSCR loan, the lender evaluates the property’s net operating income (NOI) and compares it to the proposed debt service to determine eligibility.
Borrowers with a higher DSCR (ideally 1.25 or higher) are viewed as lower-risk and tend to get better loan terms and interest rates. So maximizing your DSCR is key to getting the best DSCR loan quotes.
Follow these tips to boost your DSCR and secure the most favorable DSCR financing:
Review your financials and optimize income and expenses
Before even applying for a DSCR loan, take time to thoroughly review your property financials. Look for any opportunities to increase your rental income through higher rents, decreased vacancies, or additional units/bedrooms.
Find the right lender for your specific needs
Not all lenders are created equal when it comes to DSCR loans. Many mainstream banks avoid this kind of non-recourse, asset-based lending.Specialized lenders like private finance companies and alternative lenders are often better suited.
What lending institutions offer the best DSCR loans in the UK?
Some top DSCR lenders in the UK include:
- Octopus Property: Known for quick approvals and lending based on property value.
- Landbay: Offers fixed and variable rate loans with flexible terms.
- Shawbrook Bank: Provides both residential and commercial property loans.
- LendInvest: Features fast online applications and competitive rates.
- Precise Mortgages: Specializes in complex prime and commercial loans.
Compare multiple lender quotes side-by-side
Do not just go with the first DSCR quote you receive. Take the time to get proposals from several different lenders so you can compare all the key factors like:
- Interest rates
- Loan fees/closing costs
- Loan-to-value limits
- Debt service coverage requirements
- Loan terms
- Prepayment penalties
Weighing multiple quotes side-by-side allows you to find the best overall DSCR loan for your situation.
What criteria should you compare between DSCR loan quotes?
When comparing DSCR loan quotes, look at:
- Interest rates – Lower is better. Watch for hidden fees rolled into rate.
- Loan term lengths – Longer terms mean lower payments but higher total interest.
- Prepayment penalties – Avoid loans with excessive early repayment fees.
- Loan fees – Upfront costs and closing fees should be reasonable.
- DSCR requirements – Look for the lowest minimum DSCR needed.
- Amortization – Interest-only payments mean lower debt service.
- Loan proceeds – Optimize how much cash you need from the loan.
- Loan flexibility – See if extra payments or recasting is allowed.
How can you maximize your DSCR when applying for loans?
Your debt service coverage ratio compares your property’s net operating income to your required debt payments. To maximize your DSCR:
- Increase rents – Raise rents to market rates with proper notice
- Fill vacancies – Prioritize filling empty units quickly
- Cut expenses – Reduce operating costs without sacrificing maintenance
- Pay down debt – Pay off high-interest loans or credit cards
- Refinance existing mortgages – Lower debt payments free up DSCR
- Make extra principal payments – Recast loans after paying loan balances down
- Extend loan terms – Stretch out amortization to lower payments
- Ask lenders about interest-only – IO periods mean smaller initial payments
What is a good DSCR to target when applying for loans?
A DSCR of 1.0 means your property’s income exactly covers the debt service. That’s the minimum needed for approval.
A DSCR between 1.2 to 1.25 is generally preferred by lenders for favorable rates/terms.
Above 1.5 is considered excellent and may qualify you for the very best loan offers.
Work to get your DSCR to at least 1.25 before applying. But maximizing to 1.5 or higher will put you in prime position for great quotes.
How can you strategically structure your borrowing entity?
You can optimize your borrowing structure to maximize DSCR. Common tips include:
- Using an LLC or LP – Helps separate liability from your personal finances
- Adding co-borrowers – Combining income with family members or business partners
- Creating a trust – Asset protection trusts own property on your behalf
- Leveraging corporate credit – Banks may offer lower rates to entities vs individuals
- Using layered entities – Adds additional liability protection but more complexity
Consult experienced advisors when structuring your borrowing entity to ensure maximum benefit.
Should you work with a broker or go directly to lenders?
Working with a specialized commercial or DSCR mortgage broker is highly recommended for securing the best loan quotes. Brokers have relationships with multiple lenders and can quickly source ideal financing options tailored to your particular needs.
The legwork brokers handle (property evaluation, financial analysis, lender matching, quote comparisons, paperwork processing) provides huge advantages versus contacting lenders yourself. Paying their fee is well worth it.
What documents do you need when applying for a DSCR loan?
To apply for a DSCR loan, have these property financial documents handy:
- Rent roll – Listing current tenants, unit types, market/actual rents
- Operating statements – Detailed income and expenses for the property
- Schedule E – If property is owned by an entity or individual
- Mortgage statement – Details on existing loans against the property
- Purchase contract – If this is a purchase transaction
- Leases – Copies of current tenant lease agreements
- Tax returns – Personal and business returns related to property
Having high-quality financial data will allow lenders to accurately underwrite and size your DSCR loan.
What closing costs are associated with DSCR loans?
Typical closing costs with DSCR loans include:
- Origination fees – 1% to 5% of loan amount
- Processing fees – $500 to $1500
- Underwriting fees – Around $250 per deal
- Appraisal fees – $300 to $500 for appraisal
- Credit reports – $50 per borrower
- Legal fees – Varies based on lender
- Title fees – Title search and insurance
- Recording fees – To record loan documents
- Prepayment penalties – If paid off early
Work with your lender to minimize fees and understand all charges before closing.
What tips can boost your chances of DSCR loan approval?
To improve your odds of successfully getting a DSCR loan:
- Have a DSCR above 1.25 – The higher your ratio, the better
- Use a lower loan-to-value – Keep LTVs below 75% if possible
- Have clean property financials – Accurate rent rolls, operating history
- Show strong payment history – No late mortgage or credit card payments
- Highlight experience – Proven track record managing properties
- Have an equity cushion – At least 20% equity in the property
- Get a business credit profile – Establish credit under your LLC
- Work with a broker – They can position your profile favorably
Making yourself look as low-risk as possible on paper will go a long way towards getting approved.
What are alternatives if you don’t qualify for a DSCR loan?
If you don’t qualify for a DSCR loan, alternatives may include:
- Traditional mortgages – Require stronger personal credit/income docs
- Portfolio loans – Some banks offer in-house asset based loans
- Hard money loans – Fast but with high rates/fees
- Crowdfunded loans – Loans from a pool of investors
- Private money loans – Borrow from individuals with DSCR requirements
- Business lines of credit – Can be used short-term for down payments
- Partnership financing – Team up with co-investors to qualify
- Seller financing – May carry back financing for you
Don’t give up if your first DSCR loan application is declined. With persistence and creativity, financing can often be found.
Getting a great DSCR loan requires optimizing your financials, finding the right lender, maximizing your ratio, structuring your borrowing entity wisely, and putting your best foot forward throughout the process.
Work diligently on these fronts and be sure to enlist the help of an experienced commercial loan broker. Their expertise can prove invaluable in sourcing the ideal DSCR loan for your investment property.
With the right preparation and guidance, securing favorable DSCR financing is an attainable goal. Follow these tips and you can get the funding you need on the best possible terms.