AI summary
At a glance
- Separate three buckets: Down payment, closing costs and prepaids, and reserves.
- Example: A 25% down payment plus assumed costs and reserves totals
At a glance
55,000 on a $500,000 purchase. - Tradeoff: Compare the monthly savings from a larger down payment with the cash cushion it uses.
You plan to put 25% down on a $500,000 rental property. That is $125,000. If your account has reached that balance, are you ready to sign? Not quite—the purchase expenses and the money you need afterward are still missing.
DSCR loan down payment requirements are easier to understand in three buckets: money toward the price, money to settle the purchase, and money to keep. Here is how those buckets change the budget for the same $500,000 home.
📝 Key Takeaways
- Separate three buckets: Down payment, closing costs and prepaids, and reserves.
- Example: A 25% down payment plus assumed costs and reserves totals $155,000 on a $500,000 purchase.
- Tradeoff: Compare the monthly savings from a larger down payment with the cash cushion it uses.
DSCR upfront funds include more than the down payment
DSCR financing focuses on an investment property’s rental income. It does not mean the entire purchase price and buying costs can be financed without cash preparation. NASB’s DSCR guide discusses down payment, credit, and cash flow together.
| Bucket | Purpose | Information to gather |
|---|---|---|
| Down payment | Your contribution toward the price | Price, loan-to-value ratio, and earnest money |
| Closing costs and prepaids | Loan and settlement expenses, insurance, and tax items | Cost estimates, insurance quotes, and escrow items |
| Reserves | Funds to retain after buying | Required months, monthly calculation basis, and eligible assets |
Reserves are not all fees paid at closing. They are funds you document and retain under the loan requirements. That distinction keeps total funds needed separate from the closing-day payment.
A $500,000 purchase with a $155,000 total funds requirement
Assume a 25% down payment, $12,000 in closing costs and prepaids, and reserves equal to six months of $3,000 housing costs: $18,000.
| Item | Calculation | Amount |
|---|---|---|
| Down payment | $500,000 × 25% | $125,000 |
| Closing costs and prepaids | Illustrative amount | $12,000 |
| Post-closing reserves | $3,000 × 6 months | $18,000 |
| Total funds | Sum of the three buckets | $155,000 |
Illustration assuming 25% down, $12,000 in costs, and six months of reserves.
Of this total, $137,000 goes toward the down payment and costs; $18,000 remains as reserves. Earnest money already paid is reflected at settlement, so adding it again to the total double-counts it.
Take the calculation one step further: required reserves may not be enough for your investment plan. Add a separate budget if repairs before move-in or a longer vacancy could strain your cash.
20% or 25% down: is more always easier?
On a $500,000 property, 20% is $100,000 and 25% is $125,000. Choosing 25% lowers the loan balance by $25,000 but uses that much more cash.
| Item | 20% assumption | 25% assumption |
|---|---|---|
| Down payment | $100,000 | $125,000 |
| Loan principal | $400,000 | $375,000 |
| Cash difference | $25,000 less upfront | $25,000 more upfront |
Comparison of two assumed down payment levels. Use the actual percentages and rates offered to you.
A smaller balance can reduce principal and interest and improve DSCR. But the tradeoff changes if that extra cash is your last repair or vacancy cushion. Get the rate and payment for both options, then compare monthly savings with cash left after the purchase.
Two issues to review before committing
What if the appraisal is below the price?
A loan budget based only on the purchase price can leave a cash shortfall if the appraisal is lower. Check the value used for loan-to-value and the resulting loan amount. A gap may require revisiting the price or funding plan.
⚠️ Borrowing the down payment does not automatically solve a cash shortage
New borrowing creates another repayment obligation. The source must be explained and evaluated as an allowed source of funds. Include the added monthly expense, not just the larger bank balance.
Fill in your upfront funds worksheet
❓ DSCR down payment FAQs
Q.Can I get a DSCR loan with no down payment?
Do not build the budget around zero down. Start with the loan-to-value and cash requirements of the program you are comparing. If other collateral or separate borrowing is involved, add those obligations to the full picture.
Q.Are reserves paid at closing?
Reserves are funds kept after buying. List them separately from costs paid at closing, and document the accounts and assets accepted by the program.
Q.How do I decide whether to put more down?
Compare the quoted rate and payment savings with the additional cash required. A lower payment is not much comfort if repairs or a vacancy leave you short of funds.
Saving the down payment is a milestone. Being able to handle the property afterward is the bigger test. Complete the cash worksheet, then compare how each loan changes upfront funds and monthly costs.
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