What is DSCR Loan South Africa? How to get?

DSCR loans are one of the most reliable loan options for businesses and individuals looking for financial assistance for real estate investments. The loans are particularly based on the property cash flow of the borrower or the debt service coverage ratio instead of his income. Here in this article, we will look at the details related to DSCR loans, how you can apply, the eligibility requirements, and other relevant information about them.

What Are DSCR Loans, South Africa? How To Get Them

DSCR loans in South Africa are loans offering convenient and easy-to-access financing solutions for those who are planning to invest in real estate or property. It is a mortgage loan issued to investors for residential income-producing property. 

The borrowers do not have to pay back the loan from their other income sources; instead, it is based on the cash flow or debt service coverage ratio of property. Unlike traditional loan services, DSCR loans involve no headaches and struggles of conventional financing. 

The loan is particularly issued for business purposes. One of the best things about DSCR loans is that you can borrow money without proofing your income source like standard lending methods. Let us now first talk about the DSCR loan requirements that you have to fulfill before applying for the loan.

Eligibility Requirement 

In order to qualify for a DSCR loan, you have to make sure to fill the following requirements. If you meet the eligibility criteria of DSCR loans as mentioned below, you will get the loan amount easily. The loan requirement includes,

Loan To Value Ratio

In order to apply for the loan you have to pay 20 to 25% of the property price upfront. This means you can only borrow 75 to 80% of the property’s total value.

Debt Service Coverage Ratio

You have to make sure that the property you are borrowing the money for, can cover the loan payment.

Credit Score

Your credit score should be a minimum of 680 to be eligible for the loan. Moreover, keep in mind if the loan-to-value ratio is higher, you will need a higher credit score to get approved.

Type Of Property

You have to make sure that the property type you are applying for is either a home and apartment or a commercial space mainly for investment. 

How To Apply? Application Procedure 

Here is the description of the step by step procedure that you have to follow to apply for a DSCR loan. You have to make sure to follow the steps as it is to get the loan approved easily. To apply for a DSCR loan you have to do is,

Find A Reliable Lender

To apply for a DSCR loan you have to make sure that the lender you have chosen is the one who is reliable and trustworthy. You can look for the DSCR loan providers either online or by visiting real estate professionals in person. They will guide you the right way and will tell you about the reliable person offering a DSCR loan.

Gathering Information

After finalizing the lender now you have to gather the details about the application procedure and documents you have to submit. Also, gather the risk level the loan will come with. 

Moreover, this is the step where DSCR will be needed. The details of your loan will all be outlined, including the loan amount, fees, and terms and conditions.

Gathering Documents And Paper Working

In this third step now you have to collect all the genuine and legal documents of your business and property. You have to make sure that the documents you are gathering are explaining about the cash flow that is generated from the property. 

This is important because DSCR loans only are based on the property’s ability to generate enough cash so that the loan repayment is covered. Remember you are not required to gather any information about your finances. 

Now you have to wait and the lenders will verify your documents and will provide you with a loan agreement. It will have details about interest rates, loan terms, monthly repayment, and closing costs. Read it carefully before signing it. 

What Are the Pros And Cons Of DSCR Loans?

Here we are going to talk about some of the biggest considerations that you cannot ignore when looking for DSCR loans. You need to make sure to pay attention to the advantages and disadvantages of getting a DSCR loan so that you can finalize whether you should get the loan or not.

Pros

• DSCR loans providers offer fast funding. 
• They do not need to investigate your personal finances. Instead, you get the money quickly as compared to other conventional mortgages. 
• DSCR loans offer unlimited cash, unlike usual loans where there is a limit of the loan amount. 
• Moreover, one of the best things about DSCR loans is that they are easy to apply for and their approval procedure is very quick.

Cons

• Sometimes you might need to have cash reserves of three to six months in your savings account. However, it is not compulsory because it depends on the lender’s terms and conditions.
• Most of the DSCR loan providers offer loans with down payment. You need to pay a down payment of somewhere around 20% to 25% to get the cash.
• If you want to buy agricultural property or houses with single-room rentals, you might not get a DSCR loan. This is because DSCR loans are generally not for every type of property. 

FAQs

What is the lowest DSCR loan down payment?

The lowest down payment that most of the DSCR lenders offer is a minimum of 20%. But there are some of the DSCR lenders who are offering as low as 15% of the down payment.

What are the advantages of DSCR loans?

DSCR loans are not only easy to access, but also their application procedure and approval process are quite quick and efficient. They offer unlimited cash (as much as you need) and offer loans on all types of rental properties, whether they are short-term, long-term, multi-family, or single-family.

Are there any disadvantages of DSCR loans?

Well, yes, DSCR loans also have some of the drawbacks, including higher interest rates and big upfront payments. Their down payments usually are more and their interest rates are often higher. Moreover,  the loan is only for rental properties and certain penalties are applicable for those who pay their loan payment earlier.

How can you qualify for a DSCR loan? 

Anyone who is investing in real estate and purchasing a rental property can apply for a DSCR loan. You should have a credit score minimum of 640 and should have enough cash to pay a minimum of 20% down payment. Moreover, remember your DSCR should be 1.2 or higher to get a DSCR loan.

How does a DSCR loan work?

DSCR Loan is a loan that you get for a residential income-producing property. It works based on the debt service coverage ratio of the property instead of the income of the borrower. If you are purchasing a rental property the loan repayment will be made via the rent value you get, instead of your other income sources. 

Is it difficult to get a DSCR loan?

Yes, getting a DSCR loan is somewhat difficult, but its difficulty depends upon the quality of the property you are renting or your financial foundation. Since the DSCR loan is given based on the Debt Service Coverage Ratio, you need to make sure that it exceeds 1.0 value. This is because if your debt service coverage ratio exceeds 1.0 value, you will get the loan easily.

Can you get a DSCR loan for purchasing your own home?

You cannot get a DSCR loan to buy your own home, instead, you can only use the loan for rental properties. This means if you are buying your own home or shifting to a new home and even if you can pay back the loan amount you are not eligible for getting a DSCR loan. 

Final Thoughts  

DSCR loans are offering one of the most reliable financing solutions for businesses in South Africa. Understanding how you have to apply for DSCR loans and what requirements you have to fulfill before applying is important to increase the chances of application approval and securing finances easily. Make sure to pay attention to the above article to manage your DSCR loans without complications and crises.