What Is a DSCR Business Loan?
A DSCR — debt service coverage ratio — business loan is a type of commercial loan for investors that allows them to qualify based on the income generated by an investment property rather than their personal income.
With these Non-QM loans, borrowers don’t have to prove their personal income using tax returns, W-2s, or pay stubs. Many investors are self-employed and don’t have pay stubs or W-2s. And, unfortunately, while they have tax returns, they take deductions that can drastically reduce their taxable income, making it appear as though they earn less than they really do, potentially disqualifying them from conventional investment property loans.
With a DSCR loan, the lender evaluates the property’s rental income to determine loan eligibility and the borrower’s ability to repay their mortgage. The key metric for determining this is the debt service coverage ratio.
You can calculate your DSCR by dividing the property’s rental income by the total debt service, which includes principal, interest, taxes, insurance, and lease payments over a year. The result of this calculation is a decimal indicating whether your rental income is enough to repay the mortgage loan.
A DSCR of 1 means that the property generates enough rental income to cover debt obligations. Lenders typically like to see a DSCR above 1 because it means the borrower has enough leftover for other related expenses. However, some lenders like Griffin Funding allow for DSCRs below 1. With Griffin Funding, you can qualify for a DSCR business loan in Arkansas with a DSCR of 0.75.
Pros and Cons of DSCR Business Loans in Alabama
DSCR loans in Alabama offer an alternative path to financing for borrowers who prefer to qualify for a loan based on the rental income of a property. These loans offer advantages to investors of all types, whether new or veteran investors. The benefits of DSCR business loans in Alabama include the following:
- No limit on property quantity
- Faster closing process
- Unlimited cash out
- No personal income verification required
- As little as 20% on down payments
- Can be used for both long-term and short-term 1-4 unit residential rental properties
- Interest-only loan options
- High financing limits—up to $5,000,000 (minimum loan amount $100,000)
- Close in the name of your LLC
The downside to these loans is that they’re considered higher risk to lenders, which means potentially higher interest rates. In addition, these loans can be risky for the borrower because their income may fluctuate. For instance, if you don’t have enough renters in the property, your rental income can affect your ability to repay the loan.
Alabama DSCR Loan Requirements
The most significant requirement for a DSCR loan in Alabama is a DSCR score that meets your lender’s requirements. Most lenders require a DSCR score of 1 or above, so you should calculate your ratio before applying. Other requirements of Alabama DSCR loans include:
- Stable cash flow: Lenders must determine if you have a stable cash flow that will allow you to repay the loan. You can provide rental income information to help them calculate your DSCR.
- Appraisal: Lenders may also require an appraisal to determine the property’s current market value and ensure you’re not overpaying for the property.
- Credit history: Your Alabama DSCR loan lender will also need to determine your creditworthiness. A good credit score indicates a history of responsible financial behavior and can reduce interest rates. DSCR lenders in Alabama look for a credit score of at least 620.
- Down payment: Most lenders require a downpayment between 20 -25% of the property’s purchase price.
Work With a Trusted DSCR Lender in Alabama
DSCR commercial loans in Alabama offer a path to financing for savvy real estate investors by prioritizing property income rather than personal income.
Griffin Funding is Alabama’s trusted DSCR lender. We can help you navigate your investment journey with our specialized understanding of DSCR loans to provide expert guidance and flexible financing options tailored to your needs. Contact us today to learn more.
Frequently Asked Questions: Alabama DSCR Business Loans
What’s the minimum DSCR to qualify for a DSCR business loan in Alabama?
The minimum DSCR to qualify for a DSCR business purpose loan in Alabama varies by lender. Most lenders require a DSCR of at least 1 or more to demonstrate your ability to repay the loan using rental income.
However, at Griffin Funding, we accept DSCRs as low as 0.75. However, this can impact your interest rates. Those with higher DSCRs can qualify for lower interest rates, reducing the total cost of the loan.
How fast can I get a DSCR business loan in Alabama?
How fast you can get a mortgage largely depends on the lender. DSCR loans typically have shorter application and closing processes than other commercial loans. Since we don’t need proof of personal income or other personal financial information, we can close on your loan much faster.
Griffin aims to complete your loan process within 30 days or less. You can streamline this process by contacting us today to determine which documents you’ll need to share with us during the application process.
How can I build a real estate portfolio using DSCR loans?
DSCR loans are designed for investors to help them build their investment portfolios. With these loans, you can purchase investment properties with lower down payments and interest rates than other types of commercial loans.
In addition, with no limit on the number of properties you purchase, you can secure financing for a property, rent it, and use the income generated to make mortgage payments.
Then, once you’ve generated enough equity from one property, you can use it to build your investment portfolio by securing financing for your next rental property.