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Although DSCR Loans don’t require income verification, calculate a debt-to-income ratio (DTI), or have any net worth or liquidity prerequisites past the standard liquid asset reserves requirements, many lenders still want to see that the guarantor(s) has/have a stable financial profile and have minimum credit requirements.
Many investors already know that credit score is a very important part of DSCR loan qualification and terms received, however there are some more important things to note on the credit report that DSCR Lenders look at and take into account. Many borrowers are surprised to learn that the credit report used by mortgage lenders is different than a standard credit report used in other cases. This version weighs more heavily on real estate debt i.e. specific history of mortgage loans (debt secured by real estate collateral).
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Past instances of mortgage lates (or sometimes referred to as “real estate lates”) are a huge impediment for a potential DSCR Loan borrower if they appear on the credit report. Mortgage Lates are instances of a missed payment on a loan secured by real estate. An important nuance to note regarding these late payments is that they only “count” as a mortgage late when the payment is more than 30 days late, even if technically it comes a few days (or weeks) after it is officially due (for example, if the payment is made on the 15th of the month when it was due on the first). This rule holds true even if a late fee is incurred per loan documents (typically kick in 5-10 days after payment due date for mortgage loans). Simply put, a mortgage late is only “late” if it was past 30 days due.
DSCR Lenders look at mortgage lates by delinquency bucket, i.e. separate “30-Day Lates,” “60-Day Lates,” and “90-Day Lates” etc. This essentially refers to how late the payment was, with treatment bucketed by if payment went past 30 days late but payment was made before the sixty-day mark (“30-Day Late”), or went past 60 days late but before 90 (“60-Day Late”). While this is another area where lenders differ in policies and qualification standards, generally up to one or even multiple 30-Day Lates on a borrower’s (guarantor’s) credit report doesn’t preclude eligibility. However, it will probably cause worse pricing (i.e. higher rate and/or fees) or some restrictions. Nevertheless, even one 60-Day Late on a mortgage-related loan is a no-go and would prevent qualification for a DSCR Loan entirely.
The good news for investors with a mortgage late blemish or two is that the third nuance of mortgage lates for DSCR Loans is that the seasoning period for mortgage lates is pretty standard among lenders of just 12 months (one year). Meaning, the real estate lates (mortgage lates) only “count” if they have occurred in the 12 months prior to the new loan, so these issues (and the disqualification they can cause) can roll off credit reports pretty quickly assuming the loan payments get back on track.
An additional aspect of credit history beyond credit score is the 12-Month Payment History of any loan on the subject property for refinances. Since many technical borrowers on DSCR Loans are entities like LLCs, and these loans will not typically show up on the sponsor’s credit reports (one of the reasons real estate investors love utilizing DSCR Loans), this payment history will be an additional documentation requirement. Even if not on the credit report, late payments on the 12-Month Payment History will still “count” as mortgage lates if applicable. This documentation piece is especially important to lenders since very few lenders want to make a new DSCR Loan to a borrower who is in default or has a shaky payment history on the current debt! Note that the 12-month payment history is still required even if the tradeline does not appear on the credit report.
Finally, many DSCR Lenders have a minimum tradeline requirement for guarantors’ credit reports. A tradeline is a credit account such as a mortgage, installment, or revolving account as shown on the credit report. Typically, to qualify for a DSCR Loan, a borrower (or individual sponsor) needs to show at least two or three tradelines with a year or more of activity, although this requirement may be waived if the guarantor has three full credit scores (from each of the major bureaus). This shows to the lender that the guarantor has experience with credit and a history of making on-time payments to lenders of all stripes.
DSCR Lenders may also ask for net worth, overall liquidity and REO (real estate owned) as well, typically on the initial application. However, these are generally not used for qualification past documenting liquid asset reserves or experience, and are more often used for any needed context when underwriting and evaluating the deal and borrower.
In addition to the credit score and background / fraud check qualification requirements for the sponsors (or guarantors) on DSCR Loans, significant negative issues on credit history, referred to as “credit events” also have significant effect on qualification eligibility as well as the pricing (i.e. rate) and limits (i.e. lower LTV limits) offered by DSCR Lenders.
There are four types of credit events for DSCR Loans. These include foreclosure, bankruptcy, short sale, or deed-in-lieu of foreclosure (DIL). The common theme is that these events represent a past history of default on a mortgage loan, which indicates a much higher risk of default in the future and as such these are scrutinized accordingly.
While one, let alone multiple credit events can render an individual (guarantor, sponsor or borrower) ineligible or facing high-rate and unfavorable terms for a DSCR Loan, the good news is that most DSCR Lenders only take into account credit events up to a few years prior to the application date of the new loan. This means that credit events in a borrower’s (guarantor) history are typically not an issue if they are more than a few years in the past.
Note that DSCR Lenders also understand that real estate investors often operate across multiple ventures and partnerships, so many DSCR programs include additional scrutiny when multiple guarantors are involved — the credit history of all sponsors signing the loan are evaluated independently.
There are generally four types of credit events taken into account for DSCR Loan qualification. First are Foreclosures (typically abbreviated as “FC”), which refer to the legal process by which a lender repossesses a property owned by the sponsor after a full loan default. A DSCR Lender will consider a foreclosure to have occurred, and thus consider it an applicable credit event, if the full legal foreclosure process were completed, including an actual lender repossession of a property through legal action. This is an important distinction because, the second and third types of credit events, Short Sales (typically abbreviated as “SS”) and Deed-In-Lieus (typically abbreviated as “DIL”) are generally results of the foreclosure process, in which an alternative solution to a full legal foreclosure was found.
Short Sales occur when there is a sale of a property for less than the outstanding mortgage balance, usually approved by a lender as an alternative to foreclosure. A Deed-in-Lieu of Foreclosure (DIL) is when a borrower voluntarily transfers the deed to the lender to avoid foreclosure (thus shortening the process). Both short sales and deed-in-lieu events are also treated as significant credit events by DSCR Lenders because they are essentially indicating the same thing as a fully completed foreclosure in an investor’s credit history.
Finally, the fourth type of event considered a credit event by DSCR Lenders is a recent investor bankruptcy. Bankruptcies are legal filings to discharge or reorganize personal debt which can include mortgage loans but also may not, depending on the individual. Each of Chapter 7, Chapter 11 and Chapter 13 bankruptcies are also considered credit events for DSCR Loan qualification, however different bankruptcy types are typically treated differently in terms of DSCR Loan eligibility and underwriting.
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When reviewing an investor’s credit history for a DSCR Loan, lenders often come across prior bankruptcies. Not all bankruptcies are the same, and understanding the type of bankruptcy and how its timeline is measured can make or break a DSCR Loan applicant’s eligibility.
Generally, DSCR Lenders will treat three different types of bankruptcies as credit events. These include Chapter 7 Bankruptcies (Liquidations), which is the most common form of personal bankruptcy. It involves selling off non-exempt assets to repay creditors and extinguishes most unsecured debt. It’s fast (usually 3–6 months) but has long-term credit consequences and indicates an individual who got into serious trouble managing debts and finances. A second type of bankruptcy, Chapter 13 Bankruptcies (Reorganizations), allows individuals to keep assets while repaying debts over 3–5 years via a court-approved plan. These are often seen as slightly less severe credit events from a lender perspective, as it can indicate an investor is “back on track” when it comes to managing credit. A third type of bankruptcy, Chapter 11 Bankruptcies (Business Reorganizations), are typically used by business entities or high-net-worth individuals and involves court-managed debt restructuring. These are less common for individual sponsors and investors seeking DSCR Loans and may require additional documentation and lender-specific interpretation.
It's important for investors with recent bankruptcies to understand the specific terminology around bankruptcy dates, specifically the difference between the Filing Date (the date the bankruptcy case is officially submitted to the court, marking the beginning of the process), the Discharge Date (the date the court formally wipes away eligible debts), and the Dismissal Date (the date the court closes the bankruptcy filing without discharging debts, often due either to noncompliance or voluntary withdrawal).
While Discharge Dates and Dismissal Dates can sometimes be used interchangeably when DSCR Lenders evaluate how long ago in the past a bankruptcy occurred (a key factor in treatment of credit events), a dismissal (versus a discharge) can signal unresolved risk and may come with additional lender scrutiny or LOE (letter of explanation) requirement. Additionally, Filing Dates are not typically relevant to DSCR Lenders, as the primary concern is when the bankruptcy was resolved. Active bankruptcies (or those with filing dates, but which are not yet resolved via discharge or dismissal) would make an investor ineligible for DSCR Loan qualification.
Seasoning, or the length of time (often expressed in months or years) since an event is the key factor for credit events when it comes to DSCR Loans. Both eligibility restrictions and penalties in the form of higher rates and worse loan terms will only apply when these credit events have occurred within a certain seasoning period prior to loan closure.
One important nuance for a well-informed borrower is to understand the specific dates that DSCR Lenders use to determine the seasoning period, as this can vary among lenders, and create small, but meaningful, differences. It’s crucial to understand and verify whether the seasoning period is calculated from the loan’s application date or the closing date. Especially when the credit event is a bankruptcy, understanding whether there will be a difference in treatment between discharge and dismissal dates. Note that typically, the date used to begin the seasoning countdown for foreclosures is the date of trustee sale or title transfer. For short sales it’s the settlement or closing date, and for deed-in-lieus (DILs) it’s likely the recording date of deed transfer.
While many aspects of DSCR Loans will be consistent from lender to lender, rules around credit events are one of the areas where there is significant diversity among lender treatment can vary materially. Thus, it is always important to confirm the specific rules, and especially for investors with credit events in their history, to dig deep on the requirements and methodology each lender utilizes, when looking for a DSCR Loan.
In general, DSCR Lenders allow qualification for borrowers (guarantors) with up to one credit event in the seven years prior to the new DSCR Loan. Multiple credit events in this period (for example, two separate foreclosures or a bankruptcy and short sale) will typically render a guarantor completely ineligible for a DSCR Loan.
For borrowers (guarantors) with one credit event, the applicable seasoning periods will vary, but will typically apply for about 36 to 48 months (3 – 4 years), while some lenders allowing seasoning for credit events to apply for only 12 or 24 months (these are rare cases). Additionally, there will likely be a variety of penalties and restrictions for DSCR loans in which a guarantor has a recent credit event. These can include basic minimum seasoning requirements (i.e. not allowed at all if less than 36 months from note date), restrictions or “overlays” (i.e. lower maximum LTVs) and pricing hits (i.e. 1% higher rate) or any combination thereof.
Investors with prior credit events should be prepared to provide documentation (e.g. discharge notices, final closing statements) and likely be prepared to submit a brief letter of explanation (LOE) outlining the cause of the event and steps taken to recover. Credit Events, even if significant and somewhat recent, are not deal-killers for DSCR Loan qualification, and come with varying lender restrictions and rules. Investors with credit events in their history should disclose them early and upfront and make sure to confirm specific seasoning rules and requirements as well as any program restrictions when considering a DSCR Loan.
For DSCR Loans qualification, unresolved public record items and derogatory tradelines are evaluated not just for credit risk, but also for their impact on title insurability, lien priority, and loan eligibility. For those unfamiliar, a “judgment” is a court order requiring the borrower to pay a specific amount to a creditor, often following legal action for unpaid debts. A “lien” is a legal claim against an asset, typically real property, filed by a creditor to secure repayment of an obligation. A “garnishment” is a court order that allows a creditor to collect on a debt over time by directly withholding funds from a borrower’s income or bank accounts. This is different from what is called a “collection,” which is a delinquent account that has been transferred to a collection agency, often due to prolonged nonpayment. Finally, a “charge-off” refers to a debt that a creditor has written off as a loss for accounting purposes, though it remains legally owed unless settled, satisfied, or barred by statute.
Generally, all DSCR Lenders will require that all open judgments, garnishments, and liens be paid off in full prior to, or at, closing. Public record items that appear as duplicates may be excluded, but only if the credit report clearly shows identical account numbers, filing dates, and amounts. If any ambiguity exists, items are treated as separate, and full documentation is required for each.
For items that are not “open,” such as collections and charge-offs, there is less black-and-white treatment for qualification for DSCR Loans. DSCR Lenders typically assess charge-offs and collections based on age, materiality, and potential to attach to title. Commonly, there is a dollar threshold for collections and charge-offs. These still must be paid off in full prior to closing unless the individual collection or charge-off is less than $250 or all collections and charge-offs in total are less than $2,000. Additionally, medical collections are frequently excluded from payoff requirements by DSCR Lenders, particularly if under a moderate threshold (e.g. <$15,000), though this is not a universal rule.
Old charge-offs are also a frequent issue that pops up in terms of DSCR Loan qualifications. The seasoning requirements (i.e. what is classified as “old”), can vary from lender to lender, but normally such liabilities will not be required to be paid off if the date of the collection or charge-off exceeds the statute of limitations for collection in the relevant state, typically in the 5–10-year range. In these cases, a signed Letter of Explanation (LOE) and any supporting documentation would typically be required, and are almost always evaluated on a case-by-case basis by DSCR Lenders.
Federal, state, and local tax liens are subject to strict scrutiny from DSCR Lenders as well. Generally, any personal tax liens for any individual guarantor will be required to be paid in full prior to closing unless, in some cases, if a formal, approved installment agreement is in place, at least two or three consecutive on-time payments have been made, and the account is current with no missed payments. In these cases, many investors can still qualify for a DSCR Loan, although policies around personal tax lien repayment plans will vary among DSCR Lenders. Some mortgage lenders, particularly those that are DTI-based, may include personal tax liens into LTV or other qualification ratio calculations, however this would be rare and unlikely for DSCR Lenders, because they tend to focus solely on the subject property for computing key financial underwriting metrics like LTV and DSCR.
Q: Can I use cash-out proceeds to pay off personal judgments or liens at closing?
A: Generally, no. Because DSCR Loans are restricted to business purposes, lenders typically prohibit paying off personal liabilities (like tax liens or collections) at the closing table. These items generally must be paid in full prior to closing using separate funds to ensure the loan remains compliant.
It’s important to note that these judgments, liens, collections, and charge-offs can be associated with the individual borrower’s (sponsor(s) or guarantor(s)), and are often personal and not business related. Because DSCR Loans must always be for a business purpose including proceeds from cash-out refinances, these personal items cannot be paid off at closing with cash-out loan proceeds. They would have to be paid off separately, with funds that are not related to the DSCR Loan transaction, so if these items are personal in nature, they must be paid off prior to closing for DSCR Loans, and the payoff can never occur at closing.
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