Interest-only DSCR loans

Qualify on the lower payment, keep more of the rent, and know what changes later.

Quick take

Depending on the lender, DSCR programs offer interest-only payments, commonly for the first ten years of a longer term, and several qualify the ratio on that lower payment. That can lift the DSCR on the same rent, at the cost of not paying down principal during the interest-only period.

How the structure works

Suppose a loan has a 40-year term with a ten-year interest-only period. For the first decade you pay interest only. After that the loan amortizes over the remaining years, so the payment rises. Depending on the lender, programs use a 30-year structure with a ten-year interest-only period instead. The exact schedule depends on the program.

Why investors like it

A higher ratio. When the lender qualifies on the interest-only payment, the payment in the formula is smaller, and the ratio goes up.
More monthly cash flow. Less goes to principal, more stays in your pocket during the interest-only period.
Flexibility. Investors who plan to sell or refinance before the period ends may not need to pay down principal.

What to weigh

You build no equity from payments during the interest-only years, so equity grows only through appreciation or paydowns you choose to make
The payment steps up when amortization begins
Depending on the lender, programs have lower maximum leverage or a minimum credit score for interest-only
Reserves may be calculated on the interest-only payment

Worked example. A $255,000 loan at an example 7.00% costs about $1,488 a month interest-only, against about $1,697 on a fully amortizing 30-year loan. On $2,750 of rent with $433 of taxes and insurance, the ratio is about 1.43 interest-only versus about 1.29 amortizing. Illustrations only, not rates or an offer.

Test both versions in the calculator, which has an interest-only switch.

Frequently asked questions

Does an interest-only option exist?

Yes, where lender guidelines allow it. Interest-only terms of ten years are common, and depending on the lender, programs test the ratio on the lower payment, which lifts the ratio on the same rent. The loan then amortizes once the interest-only period ends. See interest-only loans.

How high does the DSCR need to be?

At 1.0 or above the rent covers the payment, and that is where depending on the lender, programs are comfortable. Depending on the lender, programs approve less, to about 0.75, and separate no-ratio options skip the test. A thinner ratio often calls for more cash down, deeper reserves or a different price. See DSCR below 1.0.

What happens if I pay the loan off early?

Many DSCR loans charge a declining percentage of the balance for several years. You can often choose a longer schedule for a lower rate or a shorter one for a higher rate, and depending on the program, lenders or states restrict them. Request the schedule in writing before locking and match it to your plan.