How to Get a DSCR Loan in Louisiana

Real estate investors in Louisiana looking for a flexible financing option often turn to DSCR loans. These loans are designed specifically for investment properties, making it easier to secure funding without relying on personal income. If you want to build your real estate portfolio in Louisiana, a DSCR loan might be the right choice for you.

What Is a DSCR Loan and How Does It Work?

A Debt Service Coverage Ratio (DSCR) loan is a type of financing designed for real estate investors. Instead of focusing on personal income verification, these loans evaluate whether a property’s rental income can cover the mortgage payments. This makes them a great financing option for those who want to invest without providing tax returns or bank statements to prove income.

The service coverage ratio (DSCR) is calculated by dividing a property’s rental income by its debt obligations. Lenders use this ratio to determine if the property qualifies for a DSCR loan.

Unlike traditional loans, where lenders assess your income, creditworthiness, and tax history, DSCR loans simplify the process by prioritizing the income your investment property generates. This flexibility allows investors to scale their real estate portfolios faster, without the financial scrutiny that comes with conventional loans.

Benefits of a DSCR Loan

DSCR loans offer several advantages for real estate investors, including:

• No Personal Income Verification: Unlike traditional mortgages, these loans focus on the property’s income potential.
• Flexible Loan Terms: Investors can choose from different loan terms, including fixed or adjustable rates.
• Scalability: Great for those looking to expand their real estate portfolios quickly.
• No Tax Returns Required: Since lenders focus on rental income, there’s no need for personal income verification.
• Ideal for Short-Term Rentals: Investors in cities like New Orleans can use these loans to finance vacation rental properties.
• Faster Approval Process: DSCR loans often have a streamlined approval process compared to traditional loans, allowing investors to secure financing quickly.
• Access to Higher Loan Amounts: Because DSCR loans prioritize the property’s income potential, investors may qualify for larger loan amounts compared to conventional financing.
• Diverse Property Eligibility: These loans can be used for a variety of investment properties, including single-family homes, condos, multi-family units, and mixed-use properties.

DSCR Loan Requirements in Louisiana

To qualify for a DSCR loan in Louisiana, lenders will typically look at the following criteria:

• Minimum DSCR Requirement: This varies, as the loan options are split into three different classes: DSCR > 1.0; DSCR between 0.75 and 1.0; and DSCR < 0.75. The higher the DSCR, the lower the rates, fees, and down payment requirements.**
• Minimum Credit Score: A credit score of 620 or higher is generally needed to qualify for a DSCR loan. Some lenders may require a higher score, especially for larger loan amounts or riskier investment properties.
• Loan-to-Value Ratio (LTV): Minimum 80% LTV for strong properties. LTV limits drop with lower DSCRs and/or lower credit scores.
• Property Type: These loans can be used for a variety of real estate investments, including single-family homes, multi-unit properties, and short-term rental investments. Many investors use DSCR loans to finance Airbnb or vacation rental properties in high-demand areas like New Orleans.
• Gross Rental Income: For vacant units, use market rents, as determined by an appraiser; for occupied units, use actual rents, as per the leases.
• Housing/Property Payment: Total of principal, Interest, Property Taxes, Insurance, and HOA dues, if applicable.
• Down Payment: Most lenders require a down payment of 20-25% of the property’s value. The exact percentage depends on the borrower’s credit profile, the DSCR ratio, and the type of investment property.
• Appraisal: Required to determine the property’s value and condition; must support the purchase price and/or the desired loan-to-value ratio.
• Reserve Requirements: Lenders may require cash reserves, often equal to six full housing/property payments.
• Legal and Compliance: The property must comply with local zoning and building codes; any legal issues must be resolved.

Since these loans focus on the service coverage ratio (DSCR) rather than personal income, investors don’t need to submit traditional loan documentation like tax returns or pay stubs. Instead, the lender evaluates whether the rental income of the property is sufficient to cover the mortgage payments.

**JVM Lending has more options and lower DSCR minimums than most other lenders; many lenders have minimum DSCR requirements of 1.0.

Learn more about JVM Lending’s DSCR Loans here: DSCR Mortgage Loan

How Do You Calculate the DSCR for Your Property?

Before applying for a DSCR loan in Louisiana, you’ll need to determine whether your investment property meets the lender’s debt service coverage ratio (DSCR) requirements. This ratio is a critical factor in assessing whether a property generates enough income to cover its debt obligations.

DSCR = Gross Rental Income / Total Debt Obligations

Let’s say you own a rental property in Louisiana that generates $5,000 per month in rental income. Your total monthly mortgage payment—including principal, interest, property taxes, homeowner’s insurance, and any HOA fees—amounts to $4,000 per month. ($5,000 / $4,000 = 1.25 DSCR)

But there are many nuances to DSCR loans, as the terms are influenced by your credit score, your loan amount, your property location and your DSCR. So, as always, we recommend talking to one of the experts at JVM Lending to receive personalized and accurate DSCR scenarios.

What Does Your DSCR Ratio Mean?

• DSCR below 1.0: The property does not generate enough rental income to cover its debt obligations, making it riskier for lenders. DSCRs under 1.0 are still eligible for DSCR mortgage financing. It just may be a little more difficult to qualify.
• DSCR of 1.0: The property’s rental income exactly covers its mortgage and expenses, but there’s no additional cash flow. Some lenders may accept this, but many prefer a higher ratio.
• DSCR above 1.25: A ratio of 1.25 or higher indicates that the property generates 25% more income than necessary to cover its debt. This is seen as a strong investment and increases the likelihood of loan approval.

How to Improve Your DSCR Ratio

If your debt service coverage ratio (DSCR) is too low, there are a few strategies to improve it before applying for a loan:

• Increase Rent Prices: If the rental market allows, consider raising rent to boost gross rental income.
• Reduce Operating Expenses: Lowering expenses such as maintenance, utilities, or HOA fees can improve your ratio.
• Make a Larger Down Payment: Reducing the loan amount will lower your monthly debt obligations, improving your DSCR.
• Refinance to a Lower Interest Rate: A lower rate can decrease your monthly mortgage payments, positively impacting your ratio.
• Invest in High-Demand Rental Markets: Properties in cities with strong rental demand, such as New Orleans, Baton Rouge, and Lafayette, tend to generate higher rental incomes.

Understanding and optimizing your DSCR is crucial when applying for a DSCR loan. A higher ratio not only improves your chances of loan approval but may also help you secure better loan terms.

Best Cities in Louisiana to Buy an Investment Property

If you’re considering using a DSCR loan in Louisiana, here are some of the top cities for real estate investments:

New Orleans

New Orleans attracts millions of tourists each year, making it ideal for short-term rental investments. The city’s unique culture, festivals, and events create year-round rental demand. Investors can find lucrative opportunities in neighborhoods like the French Quarter, Garden District, and Uptown.

Baton Rouge

With Louisiana State University driving demand, Baton Rouge is a strong market for rental properties. Students, faculty, and young professionals seek housing, ensuring steady cash flow for investors. Additionally, the city’s diverse economy supports long-term property value growth.

Lafayette

Lafayette’s job market in healthcare, oil, and gas makes it attractive for professionals seeking rental properties. Its affordability compared to larger cities allows investors to acquire properties with strong cash flow potential.

Shreveport

Shreveport offers affordable housing and growing industries like gaming, healthcare, and logistics. Investors can take advantage of lower property prices while benefiting from a steady demand for rentals.

Lake Charles

With ongoing industrial projects, Lake Charles sees a high demand for workforce housing. Real estate investors can capitalize on long-term rental needs driven by its energy sector.

FAQs

Are DSCR loans a good option for long-term investments?

Yes, DSCR loans are an excellent choice for long-term real estate investments. Because they don’t rely on personal incomes and instead focus on rental revenue, they allow investors to scale their portfolios efficiently. Additionally, they provide long-term loan terms, making it easier to manage cash flow over extended periods.

Investors who plan to hold properties for extended periods benefit from stable rental income, appreciation, and tax advantages, all while leveraging the power of DSCR financing.

Additionally, because DSCR loans do not have limits on the number of properties an investor can finance, they are well-suited for those looking to expand their real estate holdings over time.

What role does earnings before interest and taxes (EBIT) play in DSCR?

While DSCR is mainly used in real estate, it’s also a key financial metric in corporate finance. Earnings Before Interest and Taxes (EBIT) plays a significant role in determining a company’s ability to cover its debt. Similarly, real estate investors can think of rental income as the EBIT of a property—before mortgage payments, taxes, and insurance are deducted.

A higher EBIT means the property generates strong cash flow before debt expenses, making it more attractive to lenders. Understanding this metric helps investors assess their investment’s financial health beyond just the DSCR ratio.

How do DSCR interest rates compare to Fannie Mae rates for an investment property?

While DSCR interest rates are lower than many other types of financing, they tend to be about 1% to 3% higher than what an investor could get with a Fannie Mae-backed loan. Once again, DSCR interest rates vary tremendously based on the actual DSCR, down payment size or equity level (for a refi), credit scores, and more.

Next Steps For Your DSCR Loan

If you’re serious about growing your real estate portfolio, JVM Lending is here to help. Our team of experts can guide you through the DSCR loan process and ensure you get the best financing option for your investment goals. Contact us today to get started!