Can You Refinance a DSCR Loan? Process & Options

A Debt Service Coverage Ratio (DSCR) loan offers a distinct financing approach for investment properties, focusing on the property’s income-generating capability rather than the borrower’s personal income. Refinancing an existing DSCR loan is possible, providing opportunities to adjust terms, access equity, or improve cash flow.

Understanding DSCR Loan Refinancing Eligibility

Refinancing a DSCR loan requires meeting specific criteria related to both the borrower and the property. Lenders assess these factors to determine eligibility and the terms of the new loan.

Borrower Qualifications

Borrower qualifications, while less focused on personal income, include creditworthiness and experience. Lenders typically seek a minimum credit score of 620, though scores of 680 or higher often lead to more favorable interest rates and terms. Some lenders may prefer borrowers with prior experience in investment properties.

Property Requirements

Property requirements for a DSCR refinance focus on its income-producing nature. The property must be an investment property, not owner-occupied, and can include single-family homes, multi-family units (up to four units), or short-term rentals. Its condition and marketability are assessed through an appraisal to ensure it can consistently generate sufficient rental income.

Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) compares the property’s net operating income (NOI) to its total debt service, indicating its ability to cover mortgage payments. A DSCR of 1.25 or higher is generally considered favorable, showing the property generates 25% more income than its debt obligations. To calculate DSCR, the property’s gross rental income is divided by its principal, interest, taxes, insurance, and any association dues (PITIA). Lenders typically use an estimated monthly rent, often determined by an appraiser’s rent schedule, to project the property’s income.

Loan Seasoning

Loan seasoning refers to the minimum time an existing DSCR loan must have been in place before it becomes eligible for refinancing. A common seasoning period ranges from 6 to 12 months. Some lenders offer options with no seasoning or shorter periods, particularly for cash-out refinances following significant property rehabilitation.

Required Documentation

Borrowers typically need to provide various documents. These commonly include current lease agreements or rent rolls, property operating statements, and bank statements demonstrating sufficient cash reserves. Personal identification and any relevant entity documents, like those for an LLC or corporation, are also required.

Available DSCR Refinance Types

DSCR loan refinancing offers distinct options, primarily categorized as rate and term refinances or cash-out refinances. Understanding the purpose and characteristics of each type helps investors select the most suitable option for their strategy.

Rate and Term Refinance

A rate and term refinance adjusts the loan’s interest rate or repayment period without extracting additional equity from the property. This option is pursued to secure a lower interest rate, which can reduce monthly payments and overall borrowing costs, or to change the loan term, such as converting an adjustable rate to a fixed rate for greater stability. The loan amount remains limited to the existing balance. For these refinances, lenders may offer loan-to-value (LTV) ratios of up to 80% of the property’s appraised value.

Cash-Out Refinance

A cash-out refinance allows investors to convert a portion of their property’s equity into liquid funds. This capital can be used for various business purposes, such as funding additional investment property acquisitions, undertaking renovations on existing properties, or consolidating other business debts. The cash-out amount is determined by the property’s appraised value and the lender’s maximum LTV for cash-out transactions, which typically ranges from 70% to 75%.

Distinction Between Refinance Types

A rate and term refinance improves the existing loan’s terms, while a cash-out refinance allows investors to leverage their property’s equity for other financial endeavors. Cash-out options typically involve slightly higher interest rates and lower maximum LTVs compared to rate and term refinances, reflecting the increased risk for lenders when equity is withdrawn.

Navigating the DSCR Refinance Application

Once eligibility is confirmed and a refinance type is chosen, the application process for a DSCR loan involves several procedural steps.

Application Submission

The process begins with the initial application submission, which can often be completed online or with a loan officer. This step involves providing basic information about the property and the borrower, initiating the lender’s review.

Underwriting

During underwriting, the lender thoroughly reviews the property’s financial performance and the borrower’s background, using the documents previously submitted to assess risk. This includes analyzing the property’s projected rental income, operating expenses, and the calculated DSCR to ensure it meets the lender’s criteria. Underwriters focus on the property’s ability to generate sufficient cash flow to cover the new debt obligation.

Appraisal and Valuation

An independent appraiser assesses the property’s market value and, importantly for DSCR loans, its income potential. This often involves a Uniform Residential Appraisal Report (Form 1004) for single-family properties, accompanied by a Single Family Comparable Rent Schedule (Form 1007) to determine market rent. For multi-unit properties, a Small Residential Income Property Appraisal Report (Form 1025) might be used, which includes both value and market rent.

Title and Legal Review

Following the appraisal, a title and legal review is conducted. This step ensures clear ownership of the property and identifies any existing liens or encumbrances that would need to be addressed before the new loan can be secured. A preliminary title report and proof of insurance are typically required during this stage.

Loan Closing

The final stage is loan closing, where all parties sign the new loan documents. For cash-out refinances, the funds are disbursed at this time. The new loan is then officially recorded, replacing the previous mortgage. The entire DSCR refinance process typically takes between 30 to 45 days, though it can sometimes be expedited to as little as 20 to 30 days depending on the complexity and efficiency of documentation submission.