Contents
- What is a DSCR Loan?
- Who Are DSCR Loans For?
- How is DSCR Calculated
- Benefits of DSCR Loan
- How to Qualify for DSCR Loan Program
- DSCR Loan Program Requirements
- How to Apply for DSCR Loan
- DSCR Loan Cost and Fees
- DSCR Loan for Foreign Nationals
- DSCR FAQ’s
A DSCR Loan is a great loan program for real estate investors who want to grow their real estate portfolio without the hassle of providing employment documentation and dealing with traditional mortgage lending guidelines.
What is a DSCR Loan?
A DSCR Loan is a Debt Service Coverage Ratio Loan that allows investors to use the cash flow of their real estate to qualify for financing. Debt Service Covrage Ratio is the borrower’s ability to repay the debt.
If you have a mortgage against your property and your annual rent revenue exceeds the annual payment this is a positive DSCR. The higher your DSCR the more income you have to repay the loan.
Using the DSCR method, lenders can determine if your property is enough money to cover your mortgage. The DSCR ratio will determine if you qualify for a loan and what the max loan amount for the property will be.
Who Are DSCR Loans For?
DSCR Loans are great for real estate investors who are looking to build their real estate portfolio. By allowing you to use the cash flow of each property, you aren’t limited to your personal income in order to qualify for the loan.
Properties can also be financed in the name of a business entity and won’t require you to finance them in your personal name. DSCR loans do not require income verification, so you won’t need to provide any tax returns or pay stubs in order to qualify for the DSCR Loan.
DSCR Loans Are Ideal For Investors
Since many investors and other self employed individuals often have very complex tax returns and many write offs, DSCR Loans offer a less complicated solution to growing a real estate portfolio.
DSCR Loan can be used for:
- Refinancing current investment properties
- Investors look to flip a property
- Investors looking to buy and hold
How is DSCR Calculated ?
DSCR Loans are calculated based on your annual gross rental income less your annual debt.
To calculate your gross rental income lender will look at two things:
1.Appraisal with Comparable Rent Schedule 9 (Form 1007) – This is ordered when you apply for the loan program and the appraiser will complete a fair market rent evaluation.
2. Lease Agreements and/or Last 12 Months of Rent Payments
The lender is going to use the lesser of these two documents to determine your gross rental income.
*In some rare cases you may be able to use the twelve months history of your LTR or STR rental income over the appraisers market rent.
DSCR Loan Example:
You purchase a 4 unit property with annual gross rental income of $60,000 per year with an annual debt payment of $50,000. You would divide $60,000 by $50,000 and your DSCR Ratio would be 1.2, which means you generate 20% more in income that it’s expenses.
The key to getting a DSCR Loan is keeping a positive cash flow on your property.
Benefits of a DSCR Loan
- There is no personal income verification: Since DSCR Loans do not take into account your personal financial information, you can purchase investment property using the merit of the deal and not your personal income.
- You can purchase multiple properties at once: DSCR loans allow you to buy as many homes as you have the assets for. You aren’t limited to buying one property at a time or to what your personal income can afford you.
- Ideal for new and seasoned investors: DSCR Loans can be used by both new and experienced investors alike. Many traditional investment loans restrict their programs to investors with experience. With DSCR loans you can begin purchasing investment properties on Day 1.
- Many property types are accepted with DSCR loans: Unlike traditional loan program which may restrict purchasing a condo or multi unit property, DSCR loans usually have no such requirements.
How To Qualify for DSCR Loan Program
Qualifying for a DSCR Loan is a very simple process. Your property’s rental revenue must meet or exceed the lender’s debt service coverage ratio requirements. Most lenders will require a DSCR of at least 1, but you may find lenders willing to go lower if you have more equity and a credit score over 680.
DSCR Loan Program Requirements
DSCR Loans have four major requirements you must meet in order to qualify for the loan. It’s important to know that each of these requirements can affect the others. So if you have a lower credit score, you may need a larger down payment, and the property may have to have more cash flow.
Coverage Ratio
Most lenders are going to require that your properties cash flow is at least enough to cover the mortgage payment. This will be a Coverage Ratio of 1. Buyer’s with lower credit scores, or higher loan to value, may need a coverage ratio of at least 1.25.
Loan to Value Ratio
Your loan to value ratio or LTV requirements are going to depend on your credit score and coverage ratio. For most purchase transactions your LTV is going to be limited to 75%-80% LTV when using a DSCR program.
Maximum Loan Amount
Some lenders will place a maximum loan amount on DSCR Loans. This will usually adjust based on your loan to value. Higher LTV loans will be limited to lower loan amounts, typically under $1,000,000.
Credit Score
Each lender sets their own credit score requirements for DSCR loans since they are a Non QM mortgage product. For best success you will want to have a credit score of 680 or higher to get the best terms. Some lenders will allow buyers with scores as low as 620 to qualify. These buyers will pay higher interest rates and may be restricted to maximum ltv of 50
How to Apply for a DSCR Loan
In order to apply for a DSCR loan you’ll want to apply with a lender who offers the program. If you aren’t sure who to use, you can click here and we can help you!
The DSCR Loan Application Process:
1.Speak with a Lender
During this part of the process you will have a conversation with a lender about the details of your loan. You learn about the requirements and fees associated with acquiring the loan.
2. Complete an Application with Property Information
You’ll provide your lender with a complete loan application including the details for the property you are looking to purchase or refinance. Remember that when you complete an application for a DSCR Loan you will NOT use your personal income.
3.Order Property Appraisal
The lender will order an appraisal on your property using Form 1007 which will provide them with a value of the property along with market rent. Your coverage ratio will partially be determined by this report.
4. Closing On Your Loan
Once you’ve gone over the loan, it’s fees, completed underwriting and have your appraisal back, you’ll be ready to close on your loan.
DSCR Loan Cost and Fees
DSCR loans are not traditional mortgage loans and as such they will typically have a higher cost than a standard mortgage. When it comes to costs and fees you should expect to pay a higher interest rate and more in upfront closing costs.
Origination Fee
An origination fee is a percentage of the total loan amount that is charged by the lender. This fee can range anywhere from 0%-3%.
Your credit profile, LTV, and loan amount can affect how much your origination fee is.
Appraisal Fees
Appraisals are required when using a DSCR loan. Since this program requires a market rent schedule the appraisal will cost more than a standard conventional loan appraisal. You should expect to pay between $500 and $1000 depending on the project.
Interest Rate
On average your interest rate on a DSCR loan will be between 1% and 2% higher than a standard mortgage for investment properties. However, since DSCR loans are a Non QM loan program there can be a large fluctuation in price between lenders.
Working with a Mortgage broker who can shop multiple lenders on your behalf should result in a lower rate.
Other Closing Fees
You will pay the same closing costs as you would with a standard conventional mortgage. This means you’ll have title fees, recording fees, and prepaid interest as part of your upfront closing costs.
DSCR Loans for Foreign Nationals
If you are not a resident of the United States but you’d like to purchase an investment property, you can do so using a DSCR loan.
With a Foreign National DSCR Loan, you can purchase an investment property, however the terms will be different than for US Citizens.
You should expect to pay a higher interest rate and you’ll need to provide a larger down payment. Most Foreign National DSCR programs limit your LTV to 60%-70% loan to value.
DSCR Loan Frequently Asked Questions:
1.What is a DSCR Loan?
A DSCR Loan is a loan program that uses the cash flow on an investment property to help you qualify for a loan. DSCR stands for Debt Service Coverage Ratio.
2.What are the requirements of a DSCR Loan?
DSCR Loans require you to typically have a coverage ratio of 1, a credit score of at least a 620 and a down payment of at least 20% to 25%.
3.Are DSCR Loans Hard Money?
DSCR Loans can be considered a type of hard money lending since they don’t’ require any income verification in order to qualify. However, rates on DSCR Loans will be lower than most hard money loan programs.
4. Are DSCR Loans for 30 Years?
DSCR loans offers multiple options for loan terms. Most will be based on a 30 year fixed rate, but 5,10,15 and interest only options are available.
5. Is it hard to get a DSCR Loan?
DSCR loans are easier to get approved for than standard mortgage loans. Approval is based on fewer factors and the process is much more streamlined.
6.What type of property Can I buy with a DSCR Loan?
You can purchase many different types of properties with a DSCR Loan. These include short and long term rentals.
7. Is a DSCR Loan a good idea?
DSCR Loans are a great program for investors who are looking to avoid providing personal income and employment information. If you have complex tax returns or many write offs, DSCR Loans can help you avoid the hassle these cause.
8. How many DSCR Loans can you have at once?
There are no restrictions to the amount of DSCR loans you can have at one time. DSCR loans are great to help you build a portfolio of investment properties quickly.