A “DSCR” loan, which stands for debt service coverage ratio, is a type of mortgage specifically designed for real estate investors. Your personal income is not considered for qualification. By using the property’s cash flow as the main qualification factor, DSCR loans provide real estate investors with the opportunity to purchase several rental properties more easily. The down payment is 15-30% and there is no limit to the number of rental homes you can aquire under this program.

Operating Income and Rental Property

One of the key aspects of DSCR loans is the consideration of the property’s rental income, usually determined by a market rent study by an appraiser. Furthermore, the actual expenses of the property, like utilities and repairs, are not used.

Loan Programs and Payment Requirements

We offer 30-year fixed loan terms and other terms vary depending on factors like credit score, type of property, investor experience and loan-to-value ratio.

Cash Out Refinance with a DSCR Home Loan

Another advantage of DSCR loans is the cash-out option. Real estate investors can tap into the equity of their properties to add properties to their property portfolio. The funds can also be use to improve the property in order to raise rent in the future. Properties are that in very good condition, with increased rents, means a higher valuation for resale.

Credit Requirements

One important factor for obtaining a DSCR loan is your credit score. Since the lender is relying on the cash flow of the property for the income, they heavily weigh scores for the highest loan-to-value amounts and best rates. You should have a score of 620 or higher for a DSCR loan.

Calculating the Debt Service Coverage Ratio (DSCR)

Calculating the Debt Service Coverage Ratio (DSCR) is an essential step in evaluating the financial viability of a property investment. The DSCR measures the property’s ability to generate enough income to cover its debt obligations, including mortgage payments.

To calculate the DSCR, you need to determine the net operating income (NOI) and the total debt payment. The formula for DSCR is as follows:

DSCR = NOI / Total Debt Payment

First, calculate the net operating income (NOI). NOI is the income generated by the property after subtracting operating expenses, such as property taxes, insurance, and maintenance costs, from the gross rental income.

Next, calculate the total debt payment. This includes the monthly mortgage payment and any other debt obligations related to the property, such as property management fees or homeowners association dues.

Once you have calculated the NOI and total debt payment, divide the NOI by the total debt payment to obtain the DSCR. A DSCR greater than 1 typically indicates that the property generates enough income to cover its debt obligations. Lenders often require a minimum DSCR of at least 1.25 to ensure a sufficient margin of safety.

By calculating the DSCR, investors can assess the property’s financial health and determine its ability to generate positive cash flow. This information is vital for making informed investment decisions and securing financing for real estate ventures.

Other Factors Considered in Approvals

In addition to calculating the debt-service coverage ratio (DSCR) for a home loan, there are several other factors that lenders consider when approving a DSCR home loan. These factors help lenders assess the borrower’s ability to service their debt and make timely loan payments.

One important consideration is the borrower’s creditworthiness, which is determined by their credit score and credit history. Lenders prefer borrowers with a good credit score, as it indicates a lower risk of defaulting on the loan. Additionally, lenders may request the borrower’s tax returns and proof of income to verify their financial stability and ability to repay the loan.

Another factor is the borrower’s current debt obligations. Lenders consider the borrower’s existing monthly debt payments, such as credit card debt, car loans, and student loans. The DSCR loan should ensure that the borrower’s total debt payments, including the new mortgage payment, do not exceed a certain percentage of their income.

Lenders may also take into account the type of property the borrower is purchasing and its potential rental income. Rental properties, particularly multifamily properties, have the advantage of generating rental income that can help cover the mortgage payment and improve the DSCR.

Finally, lenders may have additional requirements or considerations specific to the type of loan program. For example, certain loan programs may have maximum loan limits or additional documentation requirements.

Properties Eligible for a DSCR Loan

A DSCR home loan, or debt service coverage ratio home loan, can be used to purchase single family homes, 1-4 units, condos, townhomes, office buildings, warehouses, strip centers, and other commercial properties. Just give us a call to discuss your plans and goals.