Explaining DSCR Loans to Clients: A Guide for Brokers and Third-Party Originators

For brokers or third-party originators, acting with speed, simplicity and certainty is what wins you clients. But what about those investors who are more interested in a property’s cash flow than the borrower’s W-2s? Constructive Capital’s DSCR Rental Loan Program is the answer. DSCR loans compare the property’s net operating income against its debt service when reviewing loan applications. That means your clients can qualify based on rent rolls and expense sheets, not tax returns.

Plus, we offer up to 80% LTV (loan-to-value) with terms up to 30 years, including interest-only options, and a 30-day rate lock. Ready to close faster and open the doors to more opportunities with buy-and-hold investors? Here’s how DSCR underwriting works and how to walk your clients through the process and the numbers.

Keeping Deals Moving from Application to Funding

The first step in explaining how DSCR loans work is to understand exactly what they are. DSCR loans are often called DSCR rental loans or DSCR rental capital. This type of loan hinges on the Debt Service Coverage Ratio: a simple formula that compares a property’s net operating income to its debt payments.

As part of the underwriting guidelines, only the cash flow from rent is reviewed against recurring property expenses. That means no need for documentation on wages or tax returns. For those investors who have strong rental yields but inconsistent or unconventional income, looking at the DSCR allows them to still qualify for a loan.

As with many other types of loan products, there are some basic underwriting requirements. Our DSCR Rental Loan Program offers up to 80% loan-to-value and requires a minimum FICO score of 660. We also offer maximum loan amounts of up to $2 million dollars. These options greatly enhance your ability to serve a larger number of investors including those who may not fit the conventional loan profile.

Why Do DSCR Loans Matter to Investors?

First, unlike traditional mortgages, DSCR loans are focused exclusively on recurring rental income and fixed expenses. DSCR loans eliminate the need for personal tax returns or employment verification, which means that they could be an attractive option to investors with unconventional or non-traditional income, such as gig economy workers, short-term rental hosts, freelancers, commission-only sales professionals and more.

How to Explain DSCR Loans to Clients

First, explain how the DSCR is calculated. It starts with NOI or the Net Operating Income – that is the rent and all the other property income you expect to receive over the year (or month) minus the costs to run the property (maintenance, property taxes, insurance, utilities, HOA fees).

Next, we determine the PITIA, which is the client’s debt service. PITIA stands for Principal, Interest, Taxes, Insurance and Association fees. It’s the total of your loan payment (principal and interest) plus any tax, insurance or HOA costs that you escrow for each period.

To calculate the DSCR, you take all your rental income, minus operating expenses – that gives you the NOI. Then, divide that by your total debt obligations, and it will determine your PITIA. You’ll end up with a number. For example, a DSCR of 1.20 means your income covers your payments and adds a 20% cushion.

Keep in mind that at Constructive Capital, we focus on recurring income and expenses only when calculating the DSCR. We don’t factor in unexpected repairs or capex. From there, we move onto the application process. Getting a DSCR loan is straightforward, thanks to our easy-to-use Broker portal. Investors can upload the required documentation – rent rolls, lease agreements, insurance declarations and tax bills, and at that point our team will get to work.

How to Position DSCR Loans Without Your Existing Product Suite

Explaining DSCR loans to clients is only the beginning. Although they’re excellent for long-term rental strategies, it’s also a good idea to recommend complementary products when other options may suit the client’s needs better. For example, we offer Fix & Flip financing in the form of short term bridge loans for renovation projects – up to $2 million per project.

We also offer revolving lines of credit for portfolio growth or professional flippers who need quick access to capital with easy repayment structures. This is also a great opportunity for you, as a broker or third-party originator, to subscribe to our articles and podcasts for even more expert resources and strategies on how to use DSCR loans effectively. We also cover the latest in market trends, regulatory updates and underwriting best practices.

Common Client Questions Answered

We understand that you or your clients may have questions about the process. For instance, what if a property under-performs? That’s one of the core advantages of DSCR loans. As part of the underwriting process, we use conservative rent and expense projections, with a cushion built-in to handle short-term vacancies.

Clients can also use DSCR loans for multiple properties. For instance, brokers can bundle separate DSCR loans or explore our lines of credit for revolving capital across several projects. By walking your clients through the process step-by-step and using our intuitive portal, you’ll be streamlining the process while making it easy for your clients to access the capital they need, right when they need it.

Contact The Team at Constructive Capital to Get Started Today

By taking the time to explain the details of DSCR loans to your clients, including demonstrating how the math works, you’re setting yourself up to become an invaluable resource for real estate investors. Thanks to Constructive Capital’s in-depth DSCR Rental Loan Program, and our keen focus on cash-flow, competitive terms and fast, timely  funding, your clients can now tap into buy-and-hold strategies with greater confidence and peace of mind.

Adding this type of product to your portfolio of options along with other loan products like Fix and Flip financing and lines of credit, you’ll also be positioning yourself as a reliable resource for a variety of unique investing needs. Contact us today to learn more or to discuss your next steps.