If you’re considering expanding your real estate portfolio, you may have come across debt service coverage ratio (DSCR) loans. Favored by real estate investors for their focus on property cash flow rather than personal finances, DSCR loans streamline access to financing. 

But here’s the catch—not all DSCR lenders are created equal. Different lenders have unique requirements, terms, and flexibility, which can impact the success of your investment. 

To help clear the path to your next profitable property, we’ve compiled the top five questions you should ask a DSCR lender before applying. 

---

1. What Are Your DSCR Requirements? 

The debt service coverage ratio (DSCR) is the backbone of this loan type, as it measures the property’s cash flow compared to its debt obligations. To calculate DSCR, use the following formula:

DSCR = Net Operating Income (NOI) ÷ Total Debt Service

Each lender sets its own eligibility criteria, typically requiring a DSCR of 0.75 to 1.25 or higher. This figure often reflects their risk tolerance and market outlook.

Why This Question Matters 

Knowing a lender’s DSCR requirements ensures you can:

• Assess the Viability of Your Property: If your property’s cash flow doesn’t meet their minimum, you can explore ways to improve income, such as raising rents or cutting costs.
• Avoid Denials: It’s better to confirm eligibility upfront than waste time with an application that may not succeed.
• Understand Loan Terms: Lenders may offer better terms for properties with higher DSCRs as they present less risk.

Takeaway 

Before you begin, calculate your property’s DSCR and compare it to the lender’s threshold. Showing that you know your numbers positions you as a savvy investor. 

---

2. What Are Your Loan-to-Value (LTV) Ratios? 

The loan-to-value (LTV) ratio determines the percentage of a property’s value a lender is willing to finance. Here’s the formula for calculating LTV:

LTV = (Loan Amount ÷ Property Value) x 100 

For example, if a property is valued at $500,000 and the lender finances $400,000, the LTV ratio is 80%. The remaining 20% becomes your required down payment.

Why This Question Matters 

Understanding LTV ratios helps you:

• Plan Your Finances: Knowing how much upfront cash you’ll need ensures you’re financially prepared.
• Manage Risk: A lower LTV means higher equity from the start, which reduces the lender’s risk and may benefit you in terms of stability.
• Choose Properties Wisely: Opt for properties that align with your budget and the lender’s LTV policies.

Takeaway 

Confirm the lender’s LTV ratios for both purchases and refinancing. For example, Synergy Commercial Funding offers purchase LTVs up to 80% and cash-out refinance LTVs up to 75%. 

---

3. What Are Your Interest Rates and Loan Terms? 

No two DSCR lenders are the same when it comes to interest rates and terms. Some offer fixed rates, while others include adjustable-rate mortgages (ARMs). Loan terms can range from shorter durations to full 30-year options. 

Several factors influence your interest rates, such as:

• Credit Score: A higher credit score could secure a competitive rate.
• Property Type: Different types of investment properties carry varying levels of risk.
• DSCR: Higher DSCR properties usually lead to lower rates.
• LTV Ratio: A lower LTV often translates to better terms.
• Market Conditions: Interest rates are subject to economic factors like Federal Reserve policies and inflation.

Why This Question Matters 

Interest rates and terms affect the total cost of your loan, which directly impacts your profitability. For instance, choosing a fixed 30-year term ensures predictable monthly payments, while an ARM could be riskier despite the potential for lower initial payments. 

Takeaway 

Ask your lender for a breakdown of both fixed and adjustable-rate options to determine which best fits your investment strategy. 

---

4. What Documentation Will I Need to Provide? 

Unlike traditional loans, DSCR loans prioritize the property’s performance over your personal finances. However, lenders still require specific documentation to process your application efficiently. 

Commonly Requested Documents 

Synergy Commercial Funding, for example, asks for the following:

• Purchase contract (for property purchases)
• List of real estate owned
• Property insurance documentation
• Driver’s license
• Last two bank statements
• Subject property lease
• LLC/entity documentation (if applicable)
• Loan payoff amount (for refinancing)

Why This Question Matters 

Understanding documentation requirements will help you:

• Avoid Delays: Submit a complete application to expedite approval.
• Stay Organized: Keep track of required documents to streamline the process.
• Meet Standards: Ensure you can provide what’s needed without surprises.

Takeaway 

Ask for a checklist of required documents early on. A proactive approach keeps your investment timeline on track. 

---

5. Do You Offer Flexibility for Unique Scenarios? 

Real estate investments rarely follow a one-size-fits-all mold. Your situation may involve unique circumstances, such as phased construction projects, pre-leased properties, or plans to refinance in the near future.

Key Areas for Flexibility 

• Prepayment Penalties: Confirm whether paying off the loan early incurs penalties and, if so, the terms associated with them.
• Refinancing Options: Ask whether the lender allows refinancing and whether they offer competitive terms for it.
• Special Circumstances: If your property involves phased construction or unconventional rental structures, check if the lender can accommodate such scenarios.

Why This Question Matters 

The level of flexibility a lender offers can influence your entire investment process, from purchase and renovations to eventual resale or refinancing. 

Takeaway 

Choose a DSCR lender that understands your long-term goals and offers adaptability in handling unique cases. 

---

Choosing the Right DSCR Lender for Your Investment Goals 

DSCR loans empower real estate investors to scale their portfolios by focusing on property performance rather than personal finances. But success often depends on finding the right lender who aligns with your investment strategy. 

To recap, here are the five key questions to ask your lender before applying:

1. What are your DSCR requirements?
2. What are your loan-to-value (LTV) ratios?
3. What are your interest rates and loan terms?
4. What documentation will I need to provide?
5. Do you offer flexibility for unique scenarios?

Considering DSCR financing for the first time or looking for better options? Synergy Commercial Funding can help. With flexible terms and competitive rates, we make it simple to fund your next investment property. 

Start your application today and take the first step toward building your portfolio!