DSCR Loan Requirements

Last updated: September 4, 2024

In this article, we will explain DSCR loan requirements in a detailed and digestible manner. Our goal is for you to be highly confident in your understanding of DSCR loans by the time to finish reading this article and watching our accompanying video. Now, let's get started!

Loan application

While your complete loan file can be considered a loan application, there is generally a formal yet simple 'loan application' document that each member of the borrowing entity will fill out. The loan application includes a credit release authorization and an appraisal authorization form. At OfferMarket, our DSCR loan application is a simple 2-page e-sign that is accessible directly in your Loan File.

Lease and occupancy

• Purchase transactions: leases are not required unless the property is being transferred with active leases in place.
• Refinance transactions: no more than 1 unit can be vacant, in which case the maximum LTV would be reduced by 5%

A refinance is considered "Rate and Term" if the cash to borrower on the settlement statement is not more than $2,000.

Property management agreement (not required)

If your credit score is below 700 and you have no prior rental property management experience, then you may be required to have a signed property management agreement with a 3rd party property management company. This requirement depends on the specific guidelines of the institutional investor that will be purchasing your DSCR loan from OfferMarket.

Borrowing entity

The next item is very important: borrowing entity. So, if you already have an offer market account, you can just add an existing entity, for let's say a previous loan that you've done with us, you can add a borrowing entity, and now that we've added the borrowing entity, we have the EIN, when it was formed, the address of the business, we have the membership interest in the LLC. If you have more than one member, you'd add the additional member(s), and then you would upload articles of organization and your operating agreement.

You'll also be asked to upload your IRS EIN letter, and if you don't have that, you can just use a W-9 form, which you'll see here in this list.

Next thing is Verification of Mortgage. Unless the property is free and clear with no existing debt, there's a mortgage or debt in place that needs to be paid off at settlement, so you would just click into verification of mortgage. We have a simple template, otherwise, you can request a verification of mortgage from your servicer. In the verification of mortgage, it's pretty straightforward. It's very important to detail exactly what we need to see -- we need to see how many payments have been made and if there have been any late payments. And this is signed off on by your servicer, by a representative of your servicer. So you would download our template and then provide that to your servicer and then upload it back into this section.

What we do once you complete our loan application is we, essentially when you complete our loan application you authorize us to run your credit report, and what we'll do here is we'll upload the document, the credit report and the background report so that you can have fully transparent access to these documents. You'll see it's a soft tri-merge report and that will show three credit scores from each of the three credit bureaus. We use the middle score, the second highest score, to determine what credit score you have for the sake of confirming your loan terms.

Now, when we order the appraisal, we will generally send an email from the appraisal management company which includes an invoice to pay for the appraisal. Once that invoice is paid, the appraisal management company will authorize the appraiser to reach out to schedule inspection of the property. It's important to take a moment here to talk about appraisals. For a single family appraisal, for any DSCR loan, we want it to be an "As Is" appraisal. So, there's a checkbox where the appraiser will check off "As Is". If they check off "subject to repairs", then that does not qualify and we would need that to be revised. So, maybe if you haven't yet completed your renovation of a property, the appraiser goes to the property and sees that there's, you know, let's say the kitchen hasn't been fixed. Their report might show "subject to repairs" instead of "As Is" and that would be a problem.

There's a lot of other important details in terms of appraisal requirements, and I'll include a whole overview in the comments or in the description section for this video. But really we want to make sure that the condition of the property is between C1 and C4. Appraisal condition ratings range from C1 to C6. C4 means that there is some deferred maintenance. C5 would not be eligible -- that means that there's significant deferred maintenance, and C6 means that there's severe deferred maintenance which is a safety risk. So in order to qualify for a DSCR loan, the appraisal needs to be marked with a condition rating of C4 or lower.

There can't be too much deferred maintenance that's mentioned by the appraiser and because these need to be rent-ready properties, if the appraiser does mention deferred maintenance, for example, evidence of mold or possible mold in the basement, missing smoke detectors, um, then we may require those items to be cured prior to closing. So in a refinance transaction, that's generally very straightforward. In a purchase transaction, that could involve coordination with the seller, and it may be that a Fix and Flip (hard money) or as we call it a Fix and Rent loan, makes more sense on a purchase if there's a good amount of deferred maintenance that would need to be cured in order for a DSCR loan to be implemented (funded).

Next we have insurance verification. Now, with OfferMarket, we make it really easy to shop for landlord insurance. You need to have a landlord insurance policy in place. We'll include a reference to more information about landlord insurance guidelines.

Ultimately, we want to make sure that you have the most cost effective landlord insurance policy in place because that will allow you to optimize your debt service coverage ratio (DSCR) which could be the difference between qualifying for, let's say, 75 LTV instead of 70 LTV. So having really cost effective insurance is important. You can bring your own insurance or you can very easily shop with OfferMarket Insurance and get a quote very quickly through our system.

Now, next thing here, we need to see a government issued ID for each of the members of the borrowing entity, so you would be able to easily drag and drop that into our system.

And then Title order, very important. We need to make sure that there is clean title, and that prior to scheduling closing we have reviewed title work that's provided by your preferred title company. So you would simply add your preferred title company, this will, once you enter their name, this would give you the ability to enter a point of contact at the title company and then you acknowledge that if for whatever reason you do not finish this transaction and the title company invoices you for the work that they've done, that you'll pay their invoice. It's very rare that that's actually the case, but that's the acknowledgement that you see here.

Our strong preference is that we work with your preferred title company. We do have title companies that we work with or title attorneys in certain states that we work with in the event of that you don't have a recommended title company, but it's always preferred for you to use who you're most comfortable with as it relates to title.

Payoff statement, the payoff statement goes hand-in-hand with the verification of mortgage. You're going to be asking your current lender for the existing debt that you may have on the property or the servicer for the existing debt that you have on the property to provide a payoff statement that is good through a certain date, usually the good through date would be slightly after the expected closing date. So we need to make sure that there's no expiration or there's no expired payoff statement, prior to the settlement date. So that, if there is a delay with your closing, then we may ask you to get a renewed payoff statement, so that it's not expired at the time of settlement.

We ask for owner verification, this is required as one of the items to complete your loan file. It just means the settlement statement from when you purchased this property, you just simply upload that into our system, or it could be the deed from when you purchased the property. This just is a double verification that you are in fact the owner of this property and we can confirm how much you paid for the property because understanding your cost basis is a component of underwriting for DSCR loans.

Bank statements are very important, we make it really easy to connect with Plaid, which is the leading financial technology, integration system, so you can easily authorize us to download your two most recent, bank statements through this Plaid integration, or you could simply just download them from your online banking portal, and upload them into our system. We're just looking for the two most recent bank statements, and, it's important to go into a little bit more detail here about bank statements. It doesn't need to be bank statements, it could be brokerage account statements, retirement account statements, technically we need to verify liquidity, but if it's a cash out refi, you may be getting way more cash out than the amount of liquidity that we need to verify, generally we need to verify liquidity. That in reserves, you have usually 9 months of mortgage payments, for maximum LTV and 6 months of mortgage payments for lower LTVs. So you don't need to provide bank statements, we call this section bank statements, in the industry it's called "bank statement verification", but again, it could be a retirement account, it could be a brokerage account, and retirement accounts would be treated as 50% of the dollar value in the retirement account because it's a restricted account. The other common question around bank statement and liquidity verification does it need to be a bank account registered for the borrowing entity (i.e. LLC)? No, it can be a personal bank account. If it's a personal bank account, it needs to be tied to the guarantor. So if you have two members in the LLC and one owns 51% and one owns 49% of the LLC, then the bank statements or the statements that we're using to verify liquidity need to be linked to the 51% owner in that example, the guarantor on the loan. If there are two 50% members, then it could be from either member or both member. You can have as many different accounts as long as we have two consecutive months, most recent months, uploaded for each account that you're using for liquidity verification. Hopefully I haven't confused you too much. Ask any questions in the comments section, we'll be happy to answer them. It's very straightforward, especially for a cash-out refi.

ACH form, this is the form that we would fill out it's an e-sign, this is the form that you would fill out when you're ready to schedule closing. It tells us for our servicing team how we should be automatically debiting or drafting payments before we transfer them to the loan to a long-term servicer. So, we want to make sure that there aren't any missed payments during the usually 30 to 60 days when we transfer the loan from our servicing team to a longer term servicer. And you'll receive email confirmation and you'll be able to see it here in the servicing section of your Loan File once your loan is funded, information about who's currently servicing it (the loan) and then when the servicing transfer occurs, you'll see that information as well. That's why we ask for ACH form, you're essentially just telling us the instructions for how you're going to be making your monthly payment.

The W-9 form is a IRS form that you need to fill out for servicing purposes. It essentially allows us to send you your 1098 mortgage interest statement (Form 1098), which we and you then file with the IRS so you can get your tax deductions for having paid mortgage-related interest expenses. So that's a very important, simple form to fill out. And again, we enable it through eSign.

And then finally, DSCR loans are business purpose loans, and so, as a business purpose loan, you can imagine we need to verify that you are not going to be living in this property, that you are not currently living in this property. So we ask you to confirm that you live in an alternate property. So you would either provide us with a verification of mortgage for that other property or you would provide us with a mortgage statement and if you rent or if you own a property free and clear, then we have instructions here for how you would go about this simple step of verification.

So that is everything that you should expect as far as DSCR loan requirements. We make it very easy very simple for you to take care of these items while you're waiting for your appraisal report to come back. And once your appraisal report comes in, we will upload it into your loan file and we will review it in detail and let you know if there's anything that needs to be cured as far as deferred maintenance. And then we'll update your loan terms to make sure that you have the most competitive and relevant loan terms based on all of the confirmed inputs now that we're ready to lock your terms and schedule your closing.

Now, before we end this video, I do want to do a quick walkthrough of a purchase scenario. So here in this, what we call our "My Loans" section, I have a second loan file and this is for a purchase transaction. When you get an instant DSCR loan quote and you submit it, you would arrive at your loan terms and then you would be able to access your processing section. If you're purchasing this property, you may want to download a pre-approval letter. So, this is the point where, without waiting for a loan officer or waiting for your pre-approval request, you can just download a pre-approval letter that's specific to you and this property and you can include that with your offer. And then if your offer is accepted, it will be generally included in the purchase contract, especially if you're dealing with real estate agents on a on-market (MLS) transaction.

And that brings me to the next point: you would upload your purchase contract and then the same steps apply from this point forward.

Feel free to reach out to our company with any questions, and as always, you can get an instant DSCR loan quote over at OfferMarket.us -- it takes under a minute, just about, in many cases under a minute and we'd love to work with you and help you build wealth through real estate and grow and optimize your rental portfolio.

Thanks so much and have a great day!

Property appraisal and purchase contract

DSCR loan guidelines require an appraisal report. Most DSCR lenders, including OfferMarket, require the appraisal to be ordered via appraisal management company (“AMC”). The AMC’s invoice for the appraisal order is the only fee that you should expect to pay prior to settlement.

The appraisal report needs to provide the appraiser’s opinion of value and market rent, As Is.

Single family appraisal reports for DSCR loans are on Form 1004 Uniform Residential Appraisal Report for the opinion of market value with a Form 1007 Single Family Comparable Rent Schedule for the opinion of market rent.

2-4 unit appraisal reports are on Form 1025 otherwise known as Small Residential Income Property Appraisal Report. This report includes both the appraiser’s opinion of value and opinion of market rent on an As Is basis. Many DSCR lenders also require a Form 216 Operating Income Statement to accompany Form 1025.

Condominium appraisals are completed on Form 1073 Individual Condominium Unit Appraisal Report and most DSCR lenders require a Form 1007 Single Family Comparable Rent Schedule for a more comprehensive opinion of market rent.

DSCR loans are intended for rent ready properties in C4 condition or better. If your property condition is C5 or C6, it will not qualify for a DSCR loan unless the deferred maintenance is cured and the property is reinspected by the appraiser and the appraisal is revised to C4 condition or better. We’ll provide a link in the comments to review appraisal condition ratings in more detail.

Even if your property is in C4 condition or better, the appraiser may note deferred maintenance which your DSCR lender may require to be cured in order to proceed with funding. Common examples include broken handrails, broken windows, missing smoke detectors, damaged flooring, damaged drywall, mold, infestation and termite concerns. Depending on the lender and severity of the concern, photo evidence of the cure may not be sufficient and a 1004D re-inspection by the appraiser may be required.

If the appraisal indicates that the property is rural in the neighborhood characteristics section or sales and rental comps are more than 2 miles away, your property may not be eligible for a DSCR loan. We will include a link to our rural search tool that we use to proactively determine if a property may be too rural. There is a significant gray area around rural guidelines among the institutional investors on our platform that buy our DSCR loans as we do have investors that may allow an exception.

Accessory Dwelling Units (“ADU”) are another item that your DSCR lender needs to treat carefully. Most institutional investors allow 1 ADU, however, if there is more than 1 ADU, then an exception may be required.

If an exception is required, it’s important to have strong compensating factors such as credit score, liquidity, experience, less than maximum LTV.

If you are using a DSCR loan to finance a purchase, the purchase contract should include no more than 3% seller credit. Some institutional investors look at seller credit as an effective reduction in purchase price, so we strongly encourage our clients to instead have the seller agree to pay for specific closing costs if reducing your cash to close is your objective.

Property lease and occupancy

Borrowing Entity

LLC Documents

• Articles of Organization
• Operating Agreement
• Certificate of Good Standing
• IRS EIN Letter or W-9

Corporation Documents

• Articles of Incorporation
• Bylaws
• Certificate of Good Standing
• IRS EIN Letter or W-9

Personal Guarantor

DSCR loans for 1-4 unit properties must be personally guaranteed. We require one or more members representing 51%+ of the borrowing entity to serve as a personal guarantor. Here are some scenarios to make sure we are on the same page about who needs to serve as a guarantor:

• Single Member LLC:: the 100% member must serve as a guarantor
• 2 Member LLC, 50/50 ownership: both members must serve as guarantors, the lowest credit score is used for underwriting and loan terms
• 2 Member LLC, 51/49 ownership: only the 51% member needs to serve as a guarantor, this avoids the 49% member from needing their credit to be pulled and is ideal if the 49% member has lower credit
• 3 Member LLC: any combination of 2 members as long as their ownership adds up to 51% or more
• 4 Member LLC, 25/25/25/25 ownership: any combination of 3 members, the lowest credit score is used for underwriting and loan terms

Mortgage Experience

While DSCR loan guidelines vary depending on the institutional investor that purchases the DSCR loan from the originating DSCR lender, it is generally required that among the members of the borrowing entity there is a guarantor that has at least one (1) mortgage with at least 24 months of history and no late payments within the past 24 months. This "trade line" requirement is usually verified via trimerge credit report, however, it is fairly common for the borrower to have a business purpose mortgage (i.e. another DSCR loan) that does not report to personal credit. In this scenario, a verification of mortgage signed by the business purpose lender or servicer can serve as evidence of mortgage experience. The mortgage experience does not need to be active, it can be a mortgage that has since been paid off. The reason for this requirement is that institutional DSCR loan investors want the borrower to have demonstrated experience making on-time mortgage payments. If there is no verifiable mortgage experience, it is up to the DSCR lender's loan committee and their institutional investor to allow an exception. Successful exceptions to this requirement often require "compensating factors" such as high credit score, high liquidity, real estate investing experience, LTV that is 5-10% below maximum (i.e. 70% instead of 75% on a cash out refinance).

Credit Score

The institutional investors that purchase DSCR loans have implemented strict credit score requirements. There is no standard guideline for credit score, however, there are general expectations that can be set.

The credit score utilized to price the LTV and interest rate of your DSCR loan will be the lowest middle score among the guarantors in your borrowing entity. The middle score is the determined based on trimerge credit report. At OfferMarket, we are committed to protecting your credit score which is why our trimerge credit reports are always soft inquiries ("soft pull"), not hard inquiries ("hard pull").

If you have a 2 member borrowing entity where each member owns 50%, then...

As Is Value

Seasoning

Liquidity Verification

Foreign national

A foreign national is defined as a borrower who is not a permanent resident of the United States -- i.e. the borrower is not a US Citizen or Green Card holder. DSCR loan requirements for foreign nationals vary based on the guidelines of the DSCR lender and the institutional investor to whom DSCR loans are sold.

Maximum loan-to-value (LTV) for foreign national borrowers is based on DSCR. We do not require a US credit report or a US non-permanent visa -- some DSCR lenders require this. We require foreign nationals to have a valid and unexpired passport from their country of residence/citizenship.