What is a DSCR Loan?

Apr 17, 2024 | Hard Money Blog

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What is a DSCR Loan?

A DSCR (debt service coverage ratio) loan, also known as an Investor Cash Flow loan, is a type of non-QM (non-qualified mortgage) loan that allows real estate investors to qualify for a home loan without relying on their personal income. Here’s how it works and what you need to know:

  1. Purpose:
    • DSCR loans are designed for real estate investors who want to secure a loan based on their rental property’s cash flow, rather than their income tax returns or other financial paperwork.
  2. Qualification Criteria:
    • Instead of using traditional income verification, DSCR loans consider the debt service coverage ratio (DSCR).
    • The DSCR ratio compares a property’s total debt obligations (including principal and interest) to its operating income.
    • Lenders assess whether the rental income from the property can cover the monthly loan payments.
    • Credit score requirements and down payment may also apply, varying by lender.
  3. Calculating DSCR:
    • DSCR = Monthly Rental Income / PITIA (Principal, Interest, Property Taxes, Homeowners Insurance & Association Dues).
    • A good DSCR ratio is usually one or above, although flexibility exists based on other criteria.
  4. Benefits:
    • Real estate investors can use DSCR loans to purchase additional income-generating properties.
    • There’s no limit to the number of DSCR loans an investor can qualify for, making it flexible for both beginners and seasoned professionals.
  5. Non-QM Loans:

Remember, DSCR loans focus on the property’s cash flow, making them a valuable option for real estate investors seeking additional revenue streams.

How do I qualify for a DSCR loan?

To qualify for a DSCR (Debt Service Coverage Ratio) loan, you’ll need to meet specific criteria related to the property’s cash flow. Here’s how it works and what you need to know:

  1. DSCR Calculation:
  2. DSCR Formula:
    • Calculate the DSCR using this straightforward formula:
      • DSCR = Net operating income / total debt service
    • The net operating income represents the property’s cash flow, and the total debt service reflects how much you owe in debt for the property in a given year.
    • For example, if a property’s net operating income is $100,000 per year, and debt payments come to $50,000 per year, you have a 2.0 DSCR.
  3. Good DSCR Ratio:
    • A DSCR ratio above 1.0 indicates the property is breaking even.
    • Some real estate investors are content with breaking even since mortgage payments will eventually go away.
    • However, financing companies usually request a 1.25 DSCR or higher to ensure loan repayments happen without issues.
    • A higher DSCR ratio can increase your maximum loan amount.
  4. Role of DSCR in Mortgage Lending:
    • Traditional lenders often have eligibility requirements that don’t align with real estate investors and self-employed workers.
    • DSCR loans make properties more accessible to beginners and experienced investors.
    • Lenders use the DSCR ratio to assess a property’s profit margins and determine if payments are likely to continue.
    • They value long-term tenants who make steady monthly payments1.

Remember, DSCR loans focus on the property’s cash flow, making them a valuable option for real estate investors seeking additional revenue streams.

What documents do I need for a DSCR loan application?

When applying for a DSCR loan, you’ll need to provide certain documents that demonstrate the property’s ability to generate income and cover the loan payments. Here’s a list of the typical documents required:

  1. Property Information:
    • Details about the property, including the address and purchase price.
  2. Rent Rolls:
    • Documentation showing the current rental income from tenants.
  3. Projected Income:
    • Estimates of future income the property is expected to generate.
  4. Signed Lease Agreements:
    • Copies of lease agreements with tenants to verify rental income.
  5. Appraisal Reports:
    • Professional assessments of the property’s value.
  6. Loan Application:
    • A completed loan application form.
  7. Credit Report:
    • Your credit history will be reviewed as part of the application process.
  8. Bank Statements:
  9. Homeowners Insurance:
    • Proof of an annual insurance policy for the property.
  10. Additional Information:

It’s important to check with your specific lender as requirements can vary. Having these documents ready can streamline the application process for a DSCR loan. 

What Credit Score is needed for a DSCR loan?

The credit score needed for a DSCR loan in 2024 is a 660 mid score. While this will get you into a DSCR loan, your loan to value will not be as high as those with a 720+ mid credit score? If you’re looking for maximum leverage, you’ll need a 740+ mid score.

What other factors do lenders consider for DSCR loans?

When evaluating DSCR loans, lenders consider a variety of factors beyond the property’s income-generating potential. Here are some key factors that lenders may take into account:

  1. Credit History:
  2. Collateral:
  3. Financial Health:
  4. Loan-to-Value (LTV) Ratio:
  5. Property Type and Condition:
  6. Market Rent Rates:
  7. Experience as an Investor:
  8. Reserves:
  9. Debt-to-Income Ratio:
  10. Interest Rates:

These factors help lenders gauge the risk associated with the loan and determine the terms of the loan. It’s always a good idea to discuss with potential lenders to understand their specific requirements and how you can prepare for the application process.

 
 
What are DSCR loans? Find out inside the article

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  1. Benefits:
    • Real estate investors can use DSCR loans to purchase additional income-generating properties.
    • There’s no limit to the number of DSCR loans an investor can qualify for, making it flexible for both beginners and seasoned professionals.
  2. Non-QM Loans:

Remember, DSCR loans focus on the property’s cash flow, making them a valuable option for real estate investors seeking additional revenue streams.

How do I qualify for a DSCR loan?

To qualify for a DSCR (Debt Service Coverage Ratio) loan, you’ll need to meet specific criteria related to the property’s cash flow. Here’s how it works and what you need to know:

  1. DSCR Calculation:
  2. DSCR Formula:
    • Calculate the DSCR using this straightforward formula:
      • DSCR = Net operating income / total debt service
    • The net operating income represents the property’s cash flow, and the total debt service reflects how much you owe in debt for the property in a given year.
    • For example, if a property’s net operating income is $100,000 per year, and debt payments come to $50,000 per year, you have a 2.0 DSCR.
  3. Good DSCR Ratio:
    • A DSCR ratio above 1.0 indicates the property is breaking even.
    • Some real estate investors are content with breaking even since mortgage payments will eventually go away.
    • However, financing companies usually request a 1.25 DSCR or higher to ensure loan repayments happen without issues.
    • A higher DSCR ratio can increase your maximum loan amount.
  4. Role of DSCR in Mortgage Lending:
    • Traditional lenders often have eligibility requirements that don’t align with real estate investors and self-employed workers.
    • DSCR loans make properties more accessible to beginners and experienced investors.
    • Lenders use the DSCR ratio to assess a property’s profit margins and determine if payments are likely to continue.
    • They value long-term tenants who make steady monthly payments1.

Remember, DSCR loans focus on the property’s cash flow, making them a valuable option for real estate investors seeking additional revenue streams.

What documents do I need for a DSCR loan application?

When applying for a DSCR loan, you’ll need to provide certain documents that demonstrate the property’s ability to generate income and cover the loan payments. Here’s a list of the typical documents required:

  1. Property Information:
    • Details about the property, including the address and purchase price.
  2. Rent Rolls:
    • Documentation showing the current rental income from tenants.
  3. Projected Income:
    • Estimates of future income the property is expected to generate.
  4. Signed Lease Agreements:
    • Copies of lease agreements with tenants to verify rental income.
  5. Appraisal Reports:
    • Professional assessments of the property’s value.
  6. Loan Application:
    • A completed loan application form.
  7. Credit Report:
    • Your credit history will be reviewed as part of the application process.
  8. Bank Statements:
  9. Homeowners Insurance:
    • Proof of an annual insurance policy for the property.
  10. Additional Information:

It’s important to check with your specific lender as requirements can vary. Having these documents ready can streamline the application process for a DSCR loan. 

What Credit Score is needed for a DSCR loan?

The credit score needed for a DSCR loan in 2024 is a 660 mid score. While this will get you into a DSCR loan, your loan to value will not be as high as those with a 720+ mid credit score? If you’re looking for maximum leverage, you’ll need a 740+ mid score.

What other factors do lenders consider for DSCR loans?

When evaluating DSCR loans, lenders consider a variety of factors beyond the property’s income-generating potential. Here are some key factors that lenders may take into account:

  1. Credit History:
  2. Collateral:
  3. Financial Health:
  4. Loan-to-Value (LTV) Ratio:
  5. Property Type and Condition:
  6. Market Rent Rates:
  7. Experience as an Investor:
  8. Reserves:
  9. Debt-to-Income Ratio:
  10. Interest Rates:

These factors help lenders gauge the risk associated with the loan and determine the terms of the loan. It’s always a good idea to discuss with potential lenders to understand their specific requirements and how you can prepare for the application process.

 
 
Member of American Association of Private Lenders