Essential terms and definitions for real estate investors navigating DSCR loans and rental property financing.
The process of spreading loan payments over time. Most DSCR loans use 30-year amortization, meaning payments are calculated as if you'll pay off the loan over 30 years, even if the loan term is shorter.
Buy, Rehab, Rent, Refinance, Repeat. A real estate investment strategy where investors buy distressed properties, renovate them, rent them out, refinance into long-term financing (often a DSCR loan), and use the proceeds to buy another property.
A measure of investment property profitability calculated as Net Operating Income divided by property value. A 7% cap rate means the property generates 7% of its value in annual net income. Higher cap rates indicate higher returns but often higher risk.
The money left over after all property expenses and debt payments are made. Positive cash flow means the property generates more income than it costs to own and operate.
A refinance where you take out a new loan larger than your existing mortgage and receive the difference in cash. Commonly used in the BRRRR strategy to pull equity out of renovated properties.
The total amount paid toward principal and interest on a loan over a specific period, typically expressed monthly or annually. This is the denominator in the DSCR calculation.
A ratio measuring a property's ability to cover its debt payments with rental income. Calculated as Net Operating Income divided by Annual Debt Service. A DSCR of 1.0 means income exactly covers payments; 1.25 means 25% more income than needed.
The initial cash investment required to purchase a property. DSCR loans typically require 20-25% down payment for investment properties.
Potential rental income minus vacancy and credit losses. This is a more realistic income figure than gross potential rent because it accounts for periods when the property may be vacant.
An account held by the lender to pay property taxes and insurance. Monthly mortgage payments often include escrow contributions in addition to principal and interest.
A quick property valuation metric calculated as property price divided by annual gross rent. A GRM of 10 means the property costs 10 times its annual rent. Lower GRMs generally indicate better cash flow potential.
Short-term, high-interest loans typically used for property acquisition and renovation. Often refinanced into DSCR loans once the property is stabilized and generating rental income.
A loan where monthly payments cover only interest, not principal, for a specified period. Some DSCR loans offer interest-only options to maximize cash flow in early years.
The loan amount divided by the property's appraised value, expressed as a percentage. An 80% LTV means you're borrowing 80% of the property value. Lower LTV typically means better rates.
The rental rate a property could reasonably command based on comparable properties in the area. Lenders use market rent analysis to verify income projections on DSCR loan applications.
A residential property with multiple separate housing units. Includes duplexes (2 units), triplexes (3 units), quadplexes (4 units), and larger apartment buildings. DSCR loans commonly finance 1-4 unit properties.
Gross rental income minus operating expenses (excluding mortgage payments). NOI is the numerator in the DSCR calculation. Operating expenses include property taxes, insurance, maintenance, and property management.
A loan that doesn't require traditional income documentation like tax returns or pay stubs. DSCR loans are considered no-doc because they qualify based on property income rather than borrower income.
Non-Qualified Mortgage. Loans that don't meet standard government-backed loan requirements. DSCR loans are non-QM products, offering flexibility for investors who may not qualify for conventional financing.
The costs of running a rental property, including property taxes, insurance, repairs, maintenance, property management fees, utilities (if owner-paid), and HOA fees. Does not include mortgage payments.
Principal, Interest, Taxes, Insurance, and Association dues. The complete monthly housing payment including all required costs. This figure is used to calculate the debt service in DSCR calculations.
A fee charged if you pay off a loan early. Many DSCR loans include prepayment penalties (often 3-5 years), typically structured as a declining percentage of the loan balance.
The operation and oversight of rental properties, including tenant screening, rent collection, maintenance, and legal compliance. Professional management typically costs 8-10% of monthly rent.
Monthly rent divided by property purchase price. The 1% rule suggests monthly rent should be at least 1% of purchase price for good cash flow. A $200,000 property should rent for $2,000/month to meet this guideline.
The amount of time a property has been owned or a loan has been held. Some DSCR lenders require 3-6 months of ownership seasoning before refinancing, though some offer no-seasoning options.
Properties rented for short periods, typically through platforms like Airbnb or VRBO. Some DSCR lenders allow STR income, though they may apply more conservative income calculations.
A detached single-family home used as a rental property. SFRs are the most common property type financed with DSCR loans.
A rental property that is fully renovated, occupied, and generating consistent rental income. DSCR loans typically require properties to be stabilized or have clear rental potential.
The percentage of time a rental property sits empty. Lenders typically assume 5-10% vacancy when calculating DSCR to account for turnover between tenants.
A property with potential to increase value and income through renovations, better management, or rent increases. BRRRR investors often target value-add properties for renovation.
Now that you know the terminology, let's talk about financing your next investment property.
Or call 800.778.9044 to speak with Carlos and our DSCR team.
