What Is a DSCR Business Loan?

Debt Service Coverage Ratio (DSCR) loans are Non-QM loans designed for real estate investors. With these commercial loans, lenders don’t consider personal income. Instead, they determine a borrower’s ability to repay the loan using the property’s cash flow — or rental income. 

By comparing the gross rental income to the total debt service — the mortgage — DSCR lenders in Arkansas can determine if a borrower can fulfill their obligations. 

To calculate your DSCR, lenders divide the rental income by the debt obligation over the period of a month to get a decimal. A DSCR of 1 means that borrowers earn enough rental income to cover their debt obligations. DSCRs higher than 1 mean borrowers have money left over for their business, and DSCRs lower than 1 mean that a borrower’s rental income won’t cover the full cost of the mortgage payment. 

Arkansas DSCR loans are only available for real estate investors because they rely on cash flow to determine the ability to repay the loan. Therefore, these loans are not designed for borrowers wishing to purchase a primary or secondary residence or vacation home.

Pros and Cons of DSCR Business Loans in Arkansas

The most significant benefit of DSCR business loans in Arkansas is that real estate investors can qualify for the loan based on the rental income of the property rather than the personal income stated on their tax returns. Since many investors are self-employed, they take deductions on their tax returns that can affect their eligibility for other loans. However, with DSCR loans, they can still qualify using alternative methods. 

Other benefits of DSCR loans in Arkansas include:

  • No personal income verification
  • No limit on amount of properties
  • Typically quicker closing times
  • Unlimited cash out
  • As little as 20% on down payments
  • Can be used for both long-term and short-term rental properties
  • Interest-only loans available
  • Loan amounts up to $5,000,000
  • Close in the name of your LLC

Unfortunately, no loan program is perfect for every type of borrower, which is why we suggest contacting us to learn more about your options before applying for a loan. The biggest risk associated with DSCR loans in Arkansas is that they depend on your investment property’s performance. If your DSCR drops for whatever reason, it could affect your ability to repay the loan. Additionally, these loans may come with higher interest rates to offset the risk associated with the variability of income. 

Arkansas DSCR Loan Requirements

To be eligible for a DSCR commercial loan in Arkansas, you must have a DSCR that meets the threshold determined by your lender. Many DSCR landers in Arkansas prefer to see a DSCR over 1. However, Griffin Funding allows for DSCRs as low as 0.75. 

While loan requirements vary by lender, some general requirements include:

  • Cash flow: DSCR lenders in Arkansas must determine whether you have the ability to repay your debt by having an investment property with consistent cash flow. 
  • Credit history: While DSCR loans in Arkansas emphasize rental income, lenders will still consider your personal credit history, which can impact your interest rate and terms. 
  • Down payment: With Arkansas DSCR loans, you may be able to qualify with a down payment as low as 20%.
  • Minimum loan amount: Starts at $100,000 
  • Property Type/Use: Must be a business purpose DSCR loan for a residential 1-4 unit investment property. DSCR BPLs cannot be used on primary residences or second homes.

Secure a DSCR Business Loan in Arkansas

DSCR business loans in Arkansas eliminate one of the most significant barriers to funding for investors. By determining your eligibility based on the property’s rental income rather than personal income or the information on tax returns, these loans help investors secure the financing they need to grow their wealth. 

Griffin Funding is a premier DSCR lender in Arkansas. Get a mortgage today, or contact us to learn more about our mortgage programs for investors. Apply now.

Frequently Asked Questions: Arkansas DSCR Business Loans

What’s the minimum credit score you need for Arkansas DSCR business loans?

The credit score requirement for Arkansas DSCR business purpose property loans varies by lender. At Griffin Funding, you may qualify for a DSCR loan with a credit score as low as 620. 

How much do you need to put down for a DSCR business loan in Arkansas?

Generally, you’ll need between 20-25% of the purchase price. For instance, if you purchase a rental property worth $500,000, you can expect to put down between $100,000 to $150,000. The specific down payment requirements vary by lender and other factors, such as your DSCR, rental income, and credit score. 

The DSCR will have a significant influence on your down payment, interest rate, and mortgage terms. However, it may be well worth it to make a higher down payment when possible because it can help lower your loan amount and the amount you’ll pay over the life of the loan. 

In addition, making a larger down payment may get you better interest rates because it shows lenders the opportunity is less of a risk. On the other hand, smaller down payments mean larger loan amounts and potentially higher interest rates, which means paying more monthly and over the life of the loan. 

What documents are required for DSCR business loans in Arkansas?

DSCR loans are unique because they don’t require the traditional documentation of an investment property loan. Still, the lender’s duties are the same — they must ensure the borrower’s ability to repay the loan, but with a DSCR loan, they use the debt service coverage ratio instead of tax returns, pay stubs, or other personal income documentation. 

The documents required for DSCR business loans in Arkansas include the following: 

  • Property financial statements: Lenders must determine whether the property’s rental income can repay the debt. They’ll need to see financial statements to get a complete picture of a property’s income and expenses. Specific documents might include profit and loss ( P&L) statements and lease agreements. However, most of the time a lease agreement or an appraisal covering the comparable rents will suffice.
  • Appraisal: Lenders will appraise the property to determine its current market value.