A DSCR loan is a type of mortgage that is used for short-term or long-term rental investment properties. A DSCR loan does not look at any personal income or employment information, but instead the loan is qualified ONLY using the rental income analysis of the property. This loan type measures the expected cashflow of the property to determine the ability to repay and qualify for the mortgage. This product is tailor made for investors who want can qualify quickly and easily on their investment portfolio.
DSCR loans offer several advantages for real estate investors, or those looking to purchase an investment property. First, it allows you to qualify without supplying any employment or income information. Instead, your qualifying income is determined using the cashflow (or projected cashflow) from the subject property. Secondly, the approval process is typically quicker, and much easier than a traditional full document loan. This product only requires a completed loan application, valid credit report, and appraisal to confirm the property value and market rents.
It is possible to obtain a DSCR mortgage loan with a down payment as low as 15% and often without the need for private mortgage insurance (PMI). Keep in mind that a lower down payment may result in additional costs and an otherwise higher interest rate. Often a down payment of 20% + will result in much more favorable interest rates and costs. Additionally, when refinancing as a rate/term, you can typically go to 80% Loan-to-Value, or 75% Loan -to-Value when doing cash out.
To qualify for a DSCR loan, you generally need a decent credit score- usually above 640, own/rent a primary home and with a clean payment history- although options available for first time investors and first time buyers are available, and be able document and source the funds that will be used for the down payment and reserves. Typically is best to be able to show 6 months reserves on the subject property, although programs do allow for as little as 2 or 3 months. Ideally, the DSCR ratio will be above 1, or the cashflow from the property will cover the monthly debt obligation (Loan/taxes/insurance). DSCR loans are still available when the cashflow is less than the monthly debt obligation, although they come with higher rates and lower Loan-to-Values.
Example- Debt Service Coverage Ratio - Property Value: $600,000 Loan Amount: $480,000 Loan-to-Value: 80% Projected Rents: $4,000 Rate: 7%
Total Monthly Payment = $3,968 (P&I = $3,193 + Tax & Ins = $775)
DSCR Ratio: Rents $4,000 / Monthly Payment $3,968 = 1.008
- Higher Loan Limits: Bank Statement loans generally offer higher loan limits, often going up to $3 million.
- No Private Mortgage Insurance: Unlike conventional loans with less than 20% down, DSCR often do not require private mortgage insurance, which can keep your monthly payment lower.
- Flexible Qualifying Options: With a Conventional loan, there is a single formula used to calculate qualifying income from your federal tax returns. DSCR loans provide flexibility in qualifying by using only the cashflow on the subject property to qualify. Because no personal employment or income is required to qualify, these often are much quicker and easier than conventional loans, which require employment and income review. DSCR loans also can be done as interest only loans, which keep the monthly payments lower and increase the monthly cashflow generated from the property.
- Flexible Vesting Options: While conventional loans only allow for you to vest in your personal name or in a trust, DSCR loans allow for you to vest in the name of an entity - such as an LLC, S corp, or Partnership.
It's important to note that both loan types have their own advantages and considerations, and the right choice depends on your specific financial situation and goals. Consulting with a mortgage professional can help you evaluate the options and determine the best fit for your needs.