Why DSCR Loans Are the #1 Exit Strategy for Hard Money
When it comes to refinancing out of a hard money loan, DSCR (Debt Service Coverage Ratio) loans have become the dominant exit strategy for serious real estate investors. The reasons are practical and powerful.
First, DSCR loans require no tax returns and no W-2 income verification. The property qualifies itself based on its rental income relative to the mortgage payment. For self-employed investors or those whose tax returns show low adjusted gross income due to depreciation and write-offs, this eliminates the biggest conventional underwriting obstacle.
Second, DSCR loans allow LLC ownership. Your property can remain titled in your entity throughout the refinance process, preserving your asset protection structure. Conventional and FHA loans require personal name ownership, which many investors want to avoid.
Third, there is no limit on the number of financed properties. Fannie Mae conventional loans cap you at 10 financed properties total. DSCR has no such restriction, making it essential for investors scaling beyond a handful of rentals. Combined with closing timelines of 30 to 45 days, DSCR loans offer the fastest, simplest path from hard money to permanent financing.
DSCR Refinance Requirements
Understanding the requirements before you apply saves time and prevents surprises. Each DSCR lender has slightly different guidelines, but the industry standards are consistent across most programs.
The minimum DSCR ratio is typically 1.0, meaning the property's net operating income must at least equal the mortgage payment. Lenders offering sub-1.0 programs exist but charge significantly higher rates. The best pricing is reserved for ratios of 1.25 and above.
Credit score minimums range from 660 to 680 for most programs, with materially better rates available at 720 and above. Maximum LTV for a cash-out refinance is typically 75%, though some lenders extend to 80% for strong borrowers. The property must be stabilized with a tenant in place or a signed lease, and most lenders require 3 to 6 months of PITIA reserves.
| Requirement | Typical Range | Best Tier |
|---|---|---|
| Minimum DSCR | 1.0 | 1.25+ |
| Credit Score | 660 | 720+ |
| Max LTV (Cash-Out) | 75% | 70% (best rate) |
| Seasoning | 6 months | Some offer 3-mo or day-one |
| Property Status | Stabilized | Tenant in place |
| Reserves | 3–6 months PITIA | 6+ months |
| Entity | Individual or LLC | Either |
Step-by-Step: Hard Money to DSCR Close
Step 1: Complete rehab and stabilize the property. All renovation work must be finished, permits closed, and the property must be in rent-ready or occupied condition.
Step 2: Place a qualified tenant and execute a lease agreement. Most DSCR lenders require a signed lease showing market-rate rent. Screen tenants for creditworthiness and verify income at three times the monthly rent.
Step 3: Gather documentation. For DSCR loans this is minimal: signed lease, proof of hazard insurance, entity documents if using an LLC, government-issued ID, and credit authorization.
Step 4: Apply with a DSCR lender. Shop at least three lenders to compare rates, points, and terms. Get written quotes on the same day for an apples-to-apples comparison.
Step 5: Appraisal is ordered. Prepare a scope of work listing all improvements with before-and-after photos and provide comparable sales supporting your ARV estimate.
Step 6: Underwriting review. The lender verifies the DSCR ratio, reviews title, confirms insurance coverage, and validates entity documentation.
Step 7: Close. The new DSCR loan funds, pays off the hard money balance, and any surplus is wired to you as cash out. Typical timeline from application to close is 30 to 45 days.
If your hard money term is 12 months, the 6-month seasoning period falls naturally in the middle of your hold. Use months 1 through 4 for rehab, month 5 for tenant placement, and start the DSCR application in month 6. This aligns your seasoning with your stabilization timeline.
How to Calculate DSCR on Your Rehabbed Property
DSCR equals Net Operating Income divided by Total Debt Service. Here is a worked example using typical numbers for a rehabbed single-family rental:
Start with gross monthly rent of $2,800. Subtract a 5% vacancy allowance ($140) to get effective gross income of $2,660. Then subtract monthly operating expenses: property taxes at $375 per month, insurance at $125 per month, property management at 8% of rent ($224), and any HOA fees. Total monthly operating expenses come to $724.
Net Operating Income equals $2,660 minus $724, which is $1,936 per month. If your new DSCR loan is $262,500 at 7.5% on a 30-year term, the monthly principal and interest payment is approximately $1,836. Your DSCR is $1,936 divided by $1,836, which equals 1.05x.
A 1.05x DSCR qualifies with most lenders but will not get you the best pricing. To reach the 1.25x tier, you would need to either increase rent, decrease expenses, or reduce the loan amount. Use the DSCR calculator at DSCRTool.com to model different scenarios.
Model your hard money to DSCR numbers with exact inputs.
Open the Calculator →Rate Expectations: From 12% to 7-8% DSCR
Moving from hard money to a DSCR loan typically means dropping from 10-15% interest-only to 7-8.5% on a fully amortizing 30-year loan. The monthly payment impact is significant.
Consider this comparison: $225,000 at 12% interest-only costs $2,250 per month. A new DSCR loan of $262,500 at 7.5% over 30 years costs approximately $1,836 per month in principal and interest. Despite borrowing more money, your monthly payment drops by $414, saving nearly $5,000 per year.
What affects your DSCR rate: credit score (720+ gets the best pricing), DSCR ratio (1.25+ qualifies for rate improvements), LTV (lower leverage means lower risk and better rates), prepayment penalty term (accepting a longer prepay period lowers your rate), and property type (single-family residential gets the best rates).
Cash Out Scenarios: Three Worked Examples
Scenario 1 — Full Recovery: Purchase $200,000 plus rehab $50,000 equals $250,000 total invested. ARV comes in at $340,000. New loan at 75% LTV is $255,000. Pay off $160,000 hard money balance. Cash out: $95,000. Cash left in deal: zero. You recovered everything plus an extra $95,000 to deploy.
Scenario 2 — Partial Recovery: Same $250,000 invested but ARV is $300,000. Loan at 75% is $225,000. Pay off $160,000 hard money. Cash out: $65,000. Cash left in deal: $25,000. Good deal but some capital remains tied up.
Scenario 3 — Tight Deal: ARV of $280,000. Loan at 75% is $210,000. Pay off $160,000. Cash out: $50,000. Cash left in deal: $40,000. The property works if cash flow justifies the capital commitment, but you are far from full recovery.
When DSCR Refinance Does Not Work
DSCR refinancing is not always possible. In low-rent markets where achievable rents do not support a 1.0 DSCR, the loan will not qualify. If the property does not appraise at your projected ARV due to weak comparable sales or over-improvement for the neighborhood, the new loan amount will fall short.
Credit scores below 660 disqualify you from most DSCR programs. In these situations, alternatives include conventional loans if you have strong W-2 income, portfolio or community bank lenders with flexible underwriting, putting more money down to reduce the loan amount and improve the DSCR ratio, waiting for rents to increase and re-applying, or selling the property if the numbers simply do not work for a long-term hold.