DSCR Loan in South Africa: how to Apply

Ever heard of DSCR Loan? In the world of financial assistance, DSCR loans stand out as a viable option for individuals and businesses in South Africa seeking funding.

DSCR also called Debt Service Coverage Ratio loans are made to evaluate an entity’s ability to repay its debt obligations.

In this article, we’ll be reviewing how to apply for DSCR loans in South Africa, outlining the process in simple terms for prospective borrowers.

1What is DSCR?

2What is DSCR Loan in South Africa?

3How Does a DSCR Loan Work?

4How to apply for a DSCR Loan?

5What are DSCR Loan Requirements?

6How to Calculate Debt Service Coverage Ratio

7What are the advantages of DSCR Loan?

8What are the Disadvantages of DSCR Loan?

What is DSCR?

The Debt Service Coverage Ratio (DSCR) is a financial metric used by lenders to assess a borrower’s capacity to service its debt obligations.

It measures the relationship between a borrower’s operating income and its debt obligations, including interest and principal payments.

The Debt Service Coverage Ratio (DSCR) is also a measure that compares a property’s yearly rental income with its yearly mortgage debt, which includes principal, interest, taxes, insurance, and HOA fees (if there are any).

Lenders use the DSCR to figure out how much of a loan the property’s income can support and to gauge the income coverage available at a certain loan amount.

They don’t consider expenses like management, maintenance, utilities, vacancy rates, or repairs when calculating the DSCR.

A DSCR ratio above 1 indicates that the entity generates sufficient income to cover its debt obligations comfortably and a ratio below 1 suggests that the entity may struggle to meet its debt obligations.

Lenders typically prefer borrowers with DSCR ratios above 1, as it signifies lower risk and greater repayment capacity.

What is DSCR Loan in South Africa?

A DSCR loan falls under the category of Non-QM loans, which are different from traditional home loans. These loans offer an alternative way for people to borrow money without having to prove their income using standard methods.

Specifically, a DSCR loan makes it easier for real estate investors to show their rental income, even if they have deductions that lower their taxable income.

DSCR loans are particularly helpful for real estate investors because lenders can use them to decide if a borrower can repay a loan without needing to see their personal income details.

Among Non-QM mortgages DSCR loans are quite popular, with around half of all non-QM loans rated by S&P Global between 2018 and February 2025 being DSCR loans.

With a DSCR loan, real estate investors can qualify for financing by demonstrating the cash flow from their investment properties, rather than relying on traditional income documents like pay stubs or tax forms.

This is important because deductions from their properties might make it challenging for investors to prove their actual income. Lenders use the DSCR to assess if a borrower can manage the monthly loan payments.

Because DSCR loans don’t require proof of minimum income levels through pay stubs or tax returns, they’re a good choice for investors who have many deductions and write-offs for their businesses.

How Does a DSCR Loan Work?

If you’re into real estate and want to write off costs for your properties, getting a traditional loan might be tough. That’s where a debt service coverage ratio (DSCR) loan comes in handy.

It’s a way for investors to qualify more easily without needing to show tax returns or pay stubs, which might not reflect their actual income due to deductions and write-offs.

For people interested in buying homes to rent out or make money from, a DSCR loan is worth considering. Whether you’re planning to rent to long-term tenants or run a short-term rental business like Airbnb, this type of loan could be a good fit, especially if you don’t have regular employee income.

You can use a DSCR loan for different property types, including single-family homes, condos, townhomes, and small multifamily properties with 2 to 10 units.

It’s also an option for rural properties, as long as the income from the property matches up with rents in the area.

Many real estate investors find DSCR loans useful for properties that bring in rental income, helping them create new streams of revenue.

How to apply for a DSCR Loan?

Step 1: Find a lender

To get a DSCR loan, first find a bank or lender that offers this kind of loan.You can search online or ask real estate experts for recommendations.

Once you find a lender, check their requirements and gather specific information about the property.

Step 2: Provide initial information

The loan application process begins with the lender collecting information to assess the risk of the loan. You’ll need to provide your DSCR and details about the loan terms, amount, and fees.

Step 3: Collect documents

Submit all relevant paperwork related to your business and the property. Focus on documents showing cash flow, as DSCR loans depend on the property’s ability to generate enough cash to cover the debt. Personal financial documents aren’t usually required.

Step 4: Submit paperwork and close the loan

Once you’ve submitted all the required documents, the loan closing process begins.

After approval, the lender will provide you with the loan terms, monthly repayments, interest rate, and closing costs. DSCR loans often close faster because they require minimal personal financial information.

After getting approved for the DSCR loan, you’ll get an estimate of the interest rate, closing costs, and monthly payments. Be ready to pay for an appraisal and go through underwriting before signing the final papers.

Underwriting includes checking your credit, verifying rental income, and making sure everything is good to go for the loan..

What are DSCR Loan Requirements?

DSCR loans are for real estate investors who need money for their investments. These loans depend on how much money the property can make to pay back the loan. The goal is to make sure the property earns enough to cover the loan payments.

To qualify for a DSCR loan, you need a good cash flow from the property. The more money the property makes, the better your chances of getting the loan.

Lenders look at the Debt Service Coverage Ratio (DSCR) to see if you qualify. The higher the DSCR, the less risky it is for lenders.

The DSCR Loan Requirements are:

1. Loan-to-Value (LTV) Ratio:

You can borrow 75–80% of the property’s value. This means you’ll need to pay 20–25% of the property’s price upfront.

2. Debt Service Coverage Ratio:

This shows if the property’s income can cover the loan payments. Most lenders want a DSCR of 1.2 to 1.5.

3. Maximum Loan Amount:

Usually $1–5 million, depending on the property’s DSCR.

4. Credit Score:

You’ll need a credit score of at least 680. The higher the loan-to-value, the higher the credit score needed.

5. Property Types:

DSCR loans are for homes, apartments, and commercial spaces used for investment.

6. Loan Types:

You can get fixed-rate or adjustable-rate loans with terms ranging from 30 to 40 years.

7. Number of Properties Owned:

There’s no limit to how many properties you can buy with a DSCR loan.

8. Prepayment Penalties:

Borrowers may face penalties for settling the loan before the term ends, as these loans aren’t regulated like consumer loans.

So, if you pay off your loan early, you may face penalties from the lender.

How to Calculate Debt Service Coverage Ratio

The debt service coverage ratio (DSCR) formula calculates how much money a property earns compared to its debt. To find the DSCR, divide the property’s yearly rental income by its debt obligations.

First, figure out your yearly rental income. This is based on your lease agreement or a rental estimate from an appraiser. Use whichever is lower.

Sometimes, if you can prove a year of consistent rental income, you can use that instead of the appraiser’s estimate.

Next, calculate your yearly debt. This includes your yearly payments for principal, interest, taxes, insurance, and HOA fees if you have them.

Then, divide your yearly rental income by your yearly debt to find your DSCR.

It’s important to note that other factors like net operating income (NOI), capitalization rate (Cap Rate), cash on cash return (COCR), and return on investment (ROI) don’t matter for DSCR when applying for a mortgage.

Example: Let’s say a property earns $50,000 in yearly rental income and has $40,000 in yearly debt payments. Divide $50,000 by $40,000 to get a DSCR of 1.25.

This means the property makes 25% more income than it needs to repay the loan, showing positive cash flow to the lender.

What are the advantages of DSCR Loan?

DSCR loans are pretty easy to get approved for, and they go through the approval process quickly because the lender doesn’t need to check your personal income or job history. Here are the perks:

1. Easy Access

Getting a DSCR loan depends on just one thing: your DSCR number. Since the lenders don’t look into your personal money matters, these loans are open to all sorts of borrowers, whether they’re newbies or seasoned investors.

2. Quick Approval

DSCR loans usually look through the application and approval steps, making for faster closing times compared to other investment loans.

Because you don’t have to spill the beans about your personal finances, everything is pretty straightforward, and green lights come much quicker.

3. Unlimited Cash

With DSCR loans, you can get as much cash as you need, whenever you need it, to take care of stuff like repairs or whatever expenses pop up.

4. No limits on Property

Unlike traditional loans, where you have to wait till you’ve paid off your debt to buy another property, DSCR loans let you acquire as many properties as you want all at once to build your real estate empire.

5. All Rental Types are Welcome

DSCR loans are the jack-of-all-trades when it comes to rental properties. Whether it’s short-term, long-term, single-family, multi-family, or even rural, these loans got your back.

6. LLC Power

You can use an LLC to buy investment properties for your business. Getting a DSCR loan under your LLC’s name helps shield your personal asset, and if you set it up right, it won’t mess with your personal credit report. Plus, not everyone in the LLC has to vouch for the loan.

7. Big DSCR Loans:

This is ideal for those who focus on investing in high-end luxury properties. If you’re a real estate investor interested in buying up fancy, high-end properties, jumbo DSCR loans are for you.

What are the Disadvantages of DSCR Loan?

1. Big upfront payments:

Most lenders ask for a hefty down payment, usually 20% or more, which could be more than what’s needed for regular home loans.

2. Higher interest rates:

DSCR loan rates are often higher because they’re riskier for lenders. Plus, you might have to pay extra service fees, especially if you’re borrowing a lot.

3. Funding limits:

DSCR loans offer between $100,000 and $20,000,000. But if your property costs less than $100,000 or more than $20,000,000, these loans won’t fit.

4. Just for rentals:

You can only use DSCR loans for rental properties, not for buying your own home or flipping houses.

5. Empty spaces:

Vacant rental properties mean no income. Lenders might not consider your ability to pay if your property is empty, leading to more debt.

6. Early payment charges:

Many DSCR loans have penalties if you pay early, usually lasting one to five years. Although you might get a lower interest rate, it’s crucial to understand the penalty terms.

7. No fixer-uppers:

DSCR loans are for ready-to-rent properties without major repairs needed. If the property needs work, these loans aren’t an option.

FAQs

What’s the difference between a DSCR loan and a hard money loan?

DSCR loans and hard money loans are not the same. DSCR loans usually require less money upfront and have lower interest rates.
The loan terms are usually better, especially if you need a longer time to pay it back. So, for people investing in real estate, DSCR loans are often a better choice than hard money loans.

What credit score do I need for a DSCR loan?

You need a decent credit score for a DSCR loan. A score of 620 or higher can get you one. Of course, if your score is higher, you’ll likely get a better interest rate and loan terms.

What kind of property can I buy with a DSCR loan?

With a DSCR loan, you can buy properties that bring in money from either short-term or long-term renters. If you can prove it’ll make enough money, you can even buy a second home with this loan.

Conclusion

DSCR loans in South Africa offer a valuable financing option for individuals and businesses in South Africa, providing access to capital based on their ability to service debt obligations.

By understanding the application process and diligently preparing your loan application, you can increase your chances of securing funding on favorable terms.

Remember to maintain transparency with your lender, manage your loan responsibly, and leverage the funds to achieve your financial objectives effectively.

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