DSCR Cash-Out vs. Traditional Refinance
A traditional cash-out refinance and a DSCR cash-out refinance both allow you to convert your property's equity into cash. The fundamental difference lies in how you qualify.
For a traditional refinance, the lender scrutinizes your personal financial profile. They analyze your W-2s, tax returns, and bank statements to calculate your debt-to-income (DTI) ratio. Your personal income must be sufficient to cover your existing debts plus the new, larger mortgage payment.
A DSCR cash-out refinance bypasses your personal income entirely. Instead, the lender focuses on the investment property's ability to generate income. The primary qualification metric is the Debt Service Coverage Ratio (DSCR), which compares the property's gross rental income to its total housing expense. If the property's cash flow is strong enough to cover the new mortgage payment, your personal DTI is not a factor. This is ideal for self-employed investors or those with complex tax returns.
Key Differences Summarized
- Income Verification: Traditional uses personal tax returns and W-2s. DSCR uses the property's rental income.
- Primary Metric: Traditional focuses on your personal DTI. DSCR focuses on the property's cash flow ratio.
- Ideal Candidate: Traditional works for salaried employees with simple finances. DSCR is built for real estate investors whose portfolios are their primary business.
Maximum Loan-to-Value (LTV) for Cash-Out
The maximum loan-to-value (LTV) ratio determines how much you can borrow against your property's appraised value. For a DSCR cash-out refinance, lenders are typically more conservative than they are for a simple rate-and-term refinance or a primary home loan.
Most lenders cap the LTV for a DSCR cash-out at 70% to 75%. The data, information, or policy mentioned here may vary over time. Your exact LTV limit will depend on several factors:
- Your Credit Score: Higher credit scores often qualify for higher LTVs.
- The Property's DSCR: A property with very strong cash flow (e.g., a DSCR of 1.50 or higher) may be eligible for better terms.
- Property Type: A single-family residence might secure a higher LTV than a fourplex.
Cash-Out Calculation Example
Let's say you own a rental property in Henderson, Nevada, with a current market value of $500,000.
- Current Appraised Value: $500,000
- Maximum LTV Allowed: 75%
- Maximum New Loan Amount: $500,000 x 0.75 = $375,000
- Existing Mortgage Balance: $225,000
- Gross Cash-Out Potential: $375,000 (New Loan) - $225,000 (Old Loan) = $150,000
From this $150,000, you would subtract closing costs to determine your net cash in hand.
Tenant Requirements for Eligibility
Generally, lenders want to see that the property is income-producing, which means it should ideally have a tenant in place with a signed lease agreement. The lease confirms the gross monthly rent used in the DSCR calculation.
However, a vacant property doesn't automatically disqualify you. Lenders have alternative ways to verify potential income:
- Form 1007 (Single-Family Comparable Rent Schedule): If the property is vacant, the appraiser will complete a Form 1007. They analyze comparable rental listings in the immediate area to determine a fair market rent for your property. This appraised rent figure is then used for the DSCR calculation.
- Newly Signed Lease: If you have a new tenant with a signed lease agreement and a security deposit in the bank, but they have not yet moved in, many lenders will accept this as proof of future income.
Having an existing, stable tenant is the most straightforward path to approval, but these alternatives provide flexibility for investors between tenants or who have just finished renovating a property.
Property 'Seasoning' Requirements
A 'seasoning' requirement is the minimum amount of time you must own a property before a lender will allow you to do a cash-out refinance on it. Lenders implement this rule to mitigate risk, specifically to avoid financing purely speculative 'fix-and-flip' deals where an investor buys a property, makes minor cosmetic changes, and immediately tries to pull cash out at a newly inflated value.
The standard seasoning period for a DSCR cash-out refinance is six to twelve months. The data, information, or policy mentioned here may vary over time. This means the clock starts from the date your name is recorded on the property's title.
- Why it exists: It demonstrates to the lender that you have a stable, long-term investment and aren't just trying to make a quick profit on a rapidly appreciated asset.
- Exceptions: Some niche lenders may offer programs with shorter seasoning periods, but these often come with lower LTV limits or higher interest rates. The standard remains at least six months for the most competitive terms.
Calculating the DSCR for a Refinance
The DSCR formula is simple, but its components are critical. Lenders use it to measure the property's ability to pay for itself after the new, larger loan is in place.
The formula is:
DSCR = Gross Monthly Rental Income / Monthly PITI
- Gross Monthly Rental Income: This is the total rent collected as specified in the lease agreement or determined by the appraiser's rent schedule.
- PITI: This is the total proposed monthly housing payment for the new loan. It includes:
- Principal
- Interest
- Taxes (property taxes, divided by 12)
- Insurance (homeowner's insurance, divided by 12)
If the property is part of a homeowners' association (HOA), the monthly HOA dues are also added to the PITI calculation. Most lenders require a minimum DSCR of 1.20 for a cash-out refinance. The data, information, or policy mentioned here may vary over time. Some may accept a ratio as low as 1.0 (break-even) but will likely offer a lower LTV or a higher rate.
DSCR Calculation Example
Consider a rental property in Reno, Nevada.
- Gross Monthly Rent: $3,000
- Proposed New Mortgage (P&I): $1,850
- Monthly Property Taxes: $250
- Monthly Insurance: $100
- Total Monthly PITI: $1,850 + $250 + $100 = $2,200
DSCR Calculation: $3,000 / $2,200 = 1.36
Since 1.36 is well above the typical 1.20 minimum, this property would likely qualify for the cash-out refinance.
Restrictions on Using Your Cash-Out Funds
One of the most significant advantages of a cash-out refinance is the flexibility of the funds. Once the loan closes and the money is wired to your account, it is yours to use with very few restrictions. The cash is not earmarked for a specific purpose.
Common uses for cash-out funds by real estate investors include:
- Down payment for another investment property.
- Renovations on the refinanced property or another one in your portfolio.
- Paying off higher-interest debt.
- Investing in a different business venture.
- Creating a cash reserve for maintenance and vacancies.
The lender's primary concern is that the loan is secured by the property and that the property's cash flow can support the new debt. How you use the equity you've accessed is your business decision.
DSCR Loans for Short-Term and Vacation Rentals
Yes, you can use a DSCR loan to get cash out of a short-term or vacation rental property. The qualification process is slightly different because there is no long-term lease to verify income.
Instead of a lease, lenders will use third-party data to establish a credible income projection. They typically require an appraisal that includes a short-term rental income analysis. Appraisers use data from platforms like AirDNA or similar services to analyze the performance of comparable short-term rentals in the area. They look at occupancy rates, average daily rates, and seasonality to produce a reliable average monthly income figure.
This projected income is then used in the DSCR calculation. Because short-term rental income can be higher but also more variable, some lenders may require a slightly higher DSCR (e.g., 1.25 or 1.30) and may have slightly lower LTV limits for these properties. The data, information, or policy mentioned here may vary over time. Nonetheless, it remains a powerful tool for investors in thriving tourism markets.
Ready to see how much cash your Nevada rental property can unlock for your next investment? Apply now to connect with a mortgage strategist and explore your DSCR cash-out options.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
