Why No Down Payment DSCR Loans Don’t Exist—And What to Do Instead

When exploring real estate investment financing, you may have come across the idea of "no down payment DSCR loans."

 While this concept might sound appealing to investors looking to minimize upfront costs, the reality is that such loans don’t exist in the conventional lending market. Here’s why that’s the case, along with strategies to help you achieve your investment goals without needing an unrealistic zero-down option.

What Are DSCR Loans?

Debt Service Coverage Ratio (DSCR) loans are designed for real estate investors. Instead of relying on your personal income or employment history, these loans focus on the cash flow of the investment property itself. Lenders use the property’s DSCR to determine its ability to cover debt payments.

The DSCR formula is simple:

DSCR = Gross Monthly Operating Income / Total Monthly Debt (PITIA)

A DSCR of 1.0 or higher indicates that the property’s income can fully cover the loan’s payments, making it a favorable indicator for lenders. However, lenders typically require a down payment as part of the loan’s risk mitigation.

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Why Don’t No Down Payment DSCR Loans Exist?

While the appeal of a no-down-payment loan is understandable, several factors make it an unrealistic product in the DSCR space:

• Lender Risk: DSCR loans rely solely on the property’s ability to generate income. A down payment reduces the lender’s risk by ensuring you have significant equity in the property. Without this safety net, the lender’s exposure increases substantially.

• Market Standards: Unlike owner-occupied mortgages, investment property loans, including DSCR loans, are inherently riskier. Lenders mitigate this risk through higher interest rates, stricter requirements, and mandatory down payments, which are usually 20-25% of the purchase price.
• No Private Mortgage Insurance (PMI): Unlike residential loans, investment property loans typically don’t offer PMI options, which means there’s no way to insure the lender against default for high loan-to-value (LTV) scenarios.
• Profitability Assumptions: The logic of DSCR loans is tied to property cash flow. A high loan amount with no down payment would reduce profit margins and jeopardize the viability of the loan in the lender’s eyes.

Alternatives to No Down Payment DSCR Loans

While a true no-down-payment DSCR loan isn’t available, there are creative ways to minimize your upfront costs and get closer to your investment goals:

• Seller Credits / Seller Closing Cost Contributions: Some sellers are willing to finance part of the purchase price, allowing you to reduce your out-of-pocket expenses. Combining seller financing with a DSCR loan could significantly lower your required down payment. For most DSCR loan programs, the seller can contribute towards your one-time closing costs, up to 2% of the purchase price of the home.  Our DSCR program allows the seller to contribute up to 6%, making our program 3 X more competitive in this regard vs the average DSCR program.

• Leverage Equity: If you own another property, consider tapping into its equity through a home equity loan, HELOC, or cash-out refinance. This can provide the funds needed for the down payment on your new investment.
• Partner with Investors: Forming a partnership or joint venture can allow you to pool resources with other investors. This way, you can share the down payment responsibility while benefiting from shared profits.
• Cross-Collateralization: If you own other properties, some lenders offer cross-collateralization options. This involves using the equity in existing properties as collateral for the new loan, potentially eliminating the need for a traditional cash down payment.

Why Down Payments Are a Good Thing

Although a down payment may feel like a hurdle, it’s important to recognize the advantages it brings:

• Lower Monthly Payments: A higher down payment reduces your loan amount, which means lower monthly payments and improved cash flow.

• Increased Equity: Building equity in the property from the start enhances your financial stability and options for future financing.
• Better Loan Terms: Lenders often offer better interest rates and terms for borrowers with significant skin in the game.
• Risk Mitigation: Having equity in your property protects you from financial strain if the market fluctuates or unexpected expenses arise.

Choose a Trusted Partner for Your DSCR Loan Needs

We specialize in helping investors navigate the complexities of DSCR loans and find creative solutions tailored to their needs. While no-down-payment DSCR loans aren’t an option, our team is committed to helping you explore alternatives to minimize upfront costs and maximize your returns.

Whether you’re just starting out or expanding your portfolio, we’re here to guide you every step of the way. Contact us today to learn more about how we can help fund your next investment.

You can also drop us a line HERE »

Yours in successful homeownership,

Derek Bissen
Loan Originator
NMLS#365627
Unconventional Lending Program Director

Derek Bissen is a licensed Mortgage Loan Originator with over 25 years of experience in the industry. Derek is a self-employed lending expert who is known for his ability to work with borrowers who have substantial wealth and non-traditional lending needs. He is a creative loan structurer and specializes in portfolio lending, asset-based lending, bank statement lending, as well as traditional loans such as Conventional, FHA, VA, and first-time homebuyers. Derek's expertise in the mortgage industry is unparalleled. He is a trusted advisor to his clients, providing them with customized loan solutions that meet their unique financial goals and needs. His vast experience and knowledge make him a valuable asset to anyone looking to purchase a home or refinance their existing mortgage. As a highly-experienced loan originator and author, Derek is committed to sharing his knowledge with others. He regularly provides valuable insights and advice to readers looking to navigate the complex world of mortgage lending. His articles are informative, engaging, and backed by years of hands-on experience. With his wealth of knowledge and dedication to his clients, he is the go-to source for all your mortgage lending needs. If you're looking for a reliable and trustworthy mortgage expert, contact Derek today to learn more about how he can help you achieve your financial goals.