Debt-Service Coverage Ratio or DSCR loans enable real estate investors to qualify for an investment property based on rental income generated rather than personal income. These loans are ideal for self-employed investors, investors with multiple mortgaged rental properties, and investors looking to grow their portfolios rapidly. On this page, we have a comprehensive overview of DSCR loans. Use the menu below to jump to a section.
Why are DSCR Loans Significant to Investors?
Minimum Down Payment
Also referred to as investment property loans, Non-QM loans, and rental loans, among other synonyms, DSCR loans have become quite trendy recently. So what is all the buzz about? While it is possible for investors to obtain a conventional loan or funds through a small bank, this financing is tedious to qualify for and has substantial liquid reserve requirements. DSCR Loans, on the other hand, are specifically designed for the professional real estate investor to use cash flow generated by the property as a qualification. Let's take a closer look.
DSCR Loans are Underwritten Based on Gross Rental Income Instead of Personal Financial History
Experienced real estate investors with multiple mortgaged investment properties and self-employed investors without W2's often have difficulty meeting conventional loan criteria. The credit, reserve, and income requirements of conventional loans are strenuous. Further, they are underwritten using Debt-to-Income ratio or DTI, which looks at your personal assets compared to your personal debt. If you are trying to finance the purchase of a rental property with a conventional loan, the payment for the new loan will be included in the debt portion of your debt-to-income calculation. Whether you can offset that new monthly payment with a portion of the expected rent will depend on how well you can document the actual or expected rents from the property.
Investors that have a lot of personal income from non-investment property sources, may be able to cover the “cash flow gap” on their DTI calculation up to some point. Investors that are self-employed or who have multiple mortgaged investment properties may not have income from other sources to cover this gap. Using debt service coverage ratio eliminates DTI from the underwriting and instead focuses on the rental income from the subject property relative to its monthly payments.
DSCR Loans Allow Investors to Borrow in an LLC or Entity
Many experienced investors prefer to borrow through an LLC or corporation to protect their identity and other investments. This adds an extra layer of protection to the investor's personal assets for any unfortunate incidents on the property. Conventional loans can only be obtained in an individual(s) name.
Most DSCR Lenders have more flexible common sense limitations on the maximum number of properties financed
Even if an investor has enough personal income to support multiple mortgaged rentals, with traditional loans you are maxed out at ten loans. Most DSCR lenders do not have set limits but instead use common sense when evaluating an investor's maximum credit exposure.
DSCR loans require less documentation
When applying for a conventional mortgage, you have to gather all of your pay stubs, bank and asset statements, and tax documentation, including tax returns. The underwriters are going to dive deep into your personal financial documents and history, which is time consuming and tedious. Any missing documentation or schedules in your tax returns can lead to lengthy delays. Since DSCR lenders focus on the value of the property and the expected cash flow of the property, plus the quality and depth of your credit, there is far less necessary documentationt. Most DSCR lenders will not ask you for documentation to verify your employment, income or assets (beyond required liquid reserves).
How DSCR Loans Work
What makes a good Debt Service Coverage Ratio?
A debt service coverage ratio of 1.2 is solid , and anything above a 1.5 is strong. A DSCR ratio of 1 indicates the rent exactly equals the monthly sum of principal, interest, taxes, insurance, and association dues (if any). With a debt service coverage ratio below a 1, the investor will be subsidizing the PITIA with cash from other sources.
Let's look at some examples for a clearer picture.
DSCR < 1
Principal + Interest= $1,800
Total PITIA= $2235
Since the DSCR is .94, we know the PITIA is greater than the monthly rent from the property, indicating negative cash flow.
Principal + Interest= $1,500
Total PITIA= $2100
Since the DSCR is 1.0, we know the mortgage payments and PITIA expenses are equal to the monthly property rent.
Principal + Interest= $1,600
Total PITIA= $2,035
If we divide the rent by PITIA, we get a DSCR of 1.15, which indicates positive cash flow.
DSCR loans interest rates are usually 150 bps to 300 bps higher than consumer interest rates. They tend to be higher because these loans are seen as higher risk than owner-occupied homes. For more information on latest rates and how DSCR rates are calculated, see our Investment Property Mortgage Rates page.
The simplest way to improve your DSCR ratio is to increase your down payment, however you can also shop insurance, fight property taxes annually, and charge more rent. Allowing pets or including upsells such as a washer and dryer are easy ways to add more to your rent.
In addition to credit score, DSCR is an indicator of a borrower's ability to pay back a loan based on the cash flow generated by the rental property.
A more accurate description for this loan program is a "Low DSCR Loan." Essentially, this product does use DSCR, but has additional qualifications. Many lenders, like Visio Lending, offer No DSCR loans for investors in hot markets where the rents have not caught up with the property values.
Mortgage loans are expensive to originate. It is not uncommon for consumer mortgages to cost upwards of $9,000. Lenders typically recoup those costs through a combination of upfront fees and interest revenue over the life of the loan. If a borrower pays off a loan shortly after origination, the lender is at risk of losing money on the loan.
Low documentation; no personal DTI, no tax returns;
Full 30-year terms with no balloons; and
The ability to protect your identity by financing through a corporate entity
Common sense underwriting of your short-term rents
Nearly 50% of Customers are Repeat
In Vacation Rentals
|We finance DSCR loans in 38 states and Washington D.C.: Alabama, Arkansas, Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Iowa, Illinois, Indiana, Kansas, Kentucky, Louisiana, Massachusetts, Maryland, Maine, Michigan, Missouri, Mississippi, Montana, North Carolina, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington, Wisconsin, West Virginia, and Wyoming|