DSCRs and Their Influence on Hard Money Lending

Real estate investors with large portfolios need to pay attention to their debt service coverage ratios (DSCRs), especially when they hope to fund future acquisitions with traditional business loans. DSCRs are something that traditional lenders look at very closely. They are less of an issue among private lenders.

A private lender offers hard money and bridge loans for real estate transactions, among other commercial needs.  As long as investors are involved in deals that can help lenders make money, lenders are happy to get on board.

More About the DSCR

DSCR is more or less a measurement of a property’s income relative to its debt load. A property that does not generate enough rent is a money-losing property.

Retail banks look closely at DSCR because it is a clear indicator of an investor’s financial health. Imagine a large portfolio consisting of hundreds of properties. A DSCR rating of 1.0 indicates that the portfolio generates enough income to cover its debt. Anything less than 1.0 indicates a risky portfolio.

Why does this matter to a retail lender? Because retail lenders are required to verify a borrower’s ability to repay before approving loans. They must be reasonably assured that a borrower’s income can cover his debts. A low DSCR score says otherwise.

Why It’s Different for Hard Money Lenders

Although there are exceptions to the rule, most hard money lenders do not pay much attention to DSCRs. Hard money lenders are private lenders operating on a different set of regulations. They are not required to verify a borrower’s ability to repay because they make approval decisions based on asset value.

Imagine a real estate investor approaching Salt Lake City’s Actium Lending in hopes of adding a new property to his portfolio. He is prepared to offer a 50% down payment. Meanwhile, Actium determines that the property being acquired has more than enough value to cover the loan.

Actium is not interested in how the rest of the investor’s portfolio is doing. They are interested in that one property they are financing. It can more than cover the amount the investor is seeking to borrow. As a result, Actium’s risk is minimal

DSCR Loans Are Different Still

There is one particular loan for which DSCR does matter. Fittingly, it is known as the DSCR loan. It is a separate product from traditional hard money and bridge loans yet still provided by a limited number of hard money lenders.

A DSCR loan is so named because it is designed specifically for rental properties and underwritten based on the targeted property’s income. With this type of loan, a lender is exceptionally interested in DSCR because it clearly demonstrates whether the property being acquired can support borrowing.

Not a Thing for Hard Money

Real estate investors hoping to use hard money to obtain new properties generally don’t have to worry about DSCR. It is not a thing hard money lenders care a lot about. Lenders are more interested in asset value.

On the other hand, DSCRs do matter to retail lenders. So any investor hoping to work with retail banks to build their portfolios needs to pay close attention to income and debt load. Banks will leave no stone unturned to prove a borrower’s ability to repay.