A Comprehensive Guide to Getting a DSCR Loan for Airbnb

Are you considering buying an investment property to start an Airbnb business? If so, you might want to get a loan to finance the purchase. There are several loan options for investors looking to invest in Airbnb. In this article, we will focus on DSCR (Debt Service Coverage Ratio) loans.

Keep reading to learn how a DSCR loan works and how to qualify.

Debt Service Coverage Ratio Defined

A Debt Service Coverage Ratio is a metric that lenders use to assess borrowers’ ability to meet their debt obligations. If a borrower has enough cash to cover monthly loan repayments, then their DSCR ratio is usually 1 or more.

Moreover, the Debt Service Coverage Ratio determines whether an investment property can generate enough income to pay off the loan.

In recent years, DSCR loans have grown in popularity among Airbnb investors. To be eligible for this type of loan, your DSCR ratio must be high. Although rarely, some lenders may ask you to provide your employment history and proof of income to consider you for a DSCR loan.

DSCR Calculation

Before applying for a DSCR loan, it is vital you understand the Debt Service Coverage Ratio calculation to check if your investment property has the capacity to generate sufficient cash flow to secure the loan.

Here is how you can calculate your DSCR ratio:

Let’s say your monthly rent income is $2,000, and the expenses involved, including monthly loan payments, amount to $1,200. To determine your DSCR ratio, you divide the rent income by monthly expenses, that is, 2,000 ÷ 1,200 = 1.66. In this case, your DSCR ratio is higher than one. This means your investment property can service the loan.

DSCR Loan for Airbnb Business

Most Airbnb investors prefer obtaining DSCR loans because their lenders primarily focus on the income generated by the rental properties rather than investors’ documents, like tax returns, to grant such loans.

DSCR loans are processed faster than other conventional loans since they do not involve a lot of documentation.

Qualification for a DSCR Loan

You need to provide the following information to qualify for a DSCR loan:

• The physical address of the property that you have listed as collateral.
• The value of that property
• State how much you can afford to pay as a down payment.
• List expenses associated with the property.
• Indicate the vacancy rate.
• State the expected rental income from the property.

After providing this data, the lender will calculate your DSCR ratio and inform you if you qualify to take a loan for your Airbnb business.

DSCR Loan Application Process: A Step-by-Step Guide

Step 1: Find the Right DSCR Lender

When selecting a DSCR lender, find one that offers the best loan terms. Make sure you compare the interest rates charged by each lender to identify the one with the lowest rate.

Step 2: Apply for the DSCR Loan

After picking your preferred DSCR lender, you will be asked to submit a loan application. Note that you do not have to submit financial documents.

Step 3: Debt Service Coverage Ratio Calculation

Once you submit your loan application, the lender will then determine whether you qualify for the loan by calculating your DSCR. At this point, you will be requested to submit information like the expected rent income, the value of the investment property, and the expenses attached to it.

Step 4: Approval

If the lender determines your DSCR ratio to be 1 or more, they will approve your loan application. In that case, you can initiate the buying process with the seller of the investment property where you want to set up your Airbnb business.

Conclusion

Debt Service Coverage Ratio loans continue to make life easy for investors looking to buy investment property. That’s because they qualify based on the revenue generated by these assets rather than their personal income. DSCR loans are a great option, especially for investors with complex financial situations.