Interest-only (IO) DSCR loans allow investors to pay only interest for a set initial period -- typically 5 or 10 years -- before the loan converts to fully amortizing. The lower IO payment improves cash flow in the early years of a hold, which is valuable for investors who are stabilizing a property or managing carrying costs while growing their portfolio. Not all DSCR lenders offer IO options, and those that do calculate DSCR using the IO payment, not the fully amortized payment.
How DSCR Is Calculated on IO Loans
During the IO period, the monthly obligation used in the DSCR denominator is the interest-only payment rather than the fully amortized payment. This improves the DSCR calculation, making it easier for marginally performing properties to qualify. After the IO period ends, the loan converts to fully amortizing over the remaining term, which increases the monthly payment materially. Investors must plan for this payment adjustment in their hold strategy.
Which Lenders Offer IO DSCR
- ✦Angel Oak: IO option available on DSCR product; typically 10-year IO period; LTV to 75% on IO loans
- ✦Visio Lending: offers IO on select DSCR products for experienced investors with FICO 700+
- ✦Lima One Capital: IO available on DSCR with 3- or 5-year IO period; LTV restrictions apply
- ✦Deephaven: IO option on DSCR product for SFR and 2-4 unit; check current matrix for FICO floor
- ✦Prepayment penalties often apply to IO DSCR products -- confirm step-down structure before quoting
Who IO DSCR Loans Fit
IO DSCR makes the most sense for investors with a defined exit before the amortizing period begins: a planned 5-year hold with refinance or sale at year 5, or a value-add property where rents will increase substantially in the first 3 years to cover the higher amortizing payment. For investors who plan to hold long-term with no exit, the payment jump at the end of the IO period needs to be stress-tested against projected rent levels at that time.
Aria can calculate DSCR under both IO and fully amortizing payments, identify lenders with IO options, and model the payment change at IO period expiration for any loan scenario. Ask at vicariointel.com.
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