WHAT IS A DEBT SERVICE COVERAGE RATIO (DSCR) LOAN?
A DSCR or Debt Service Coverage Ratio loan is a type of non-Qualified Mortgage (non-QM) loan for real estate investors. Lenders use a property’s cash flow or debt service coverage ratio to help qualify real estate investors for a loan because it can easily determine the borrower’s ability to repay without verifying income – making this a type of no-income mortgage loan.
WHY IS A DSCR LOAN A GREAT OPTION FOR REAL ESTATE INVESTORS?
The DSCR or Debt Service Coverage Ratio mortgage loan allows real estate investors to qualify for a home loan without using their tax returns. Because real estate investors write off expenses on their properties, they may not qualify for a conventional loan, making this a great option for them. The DSCR loan allows these individuals to qualify more easily because they don’t require proof of income via tax returns or pay stubs that they either don’t have or that don’t represent their true income due to write-offs and business deductions.
As a real estate investor, you can avoid high rates and high points of private loans, lengthy approval processes, and strict lending criteria with a DSCR loan.
Securing a DSCR loan can help you expand your investment portfolio easier than ever before.
WHAT IS THE DEBT SERVICE COVERAGE RATIO?
The Debt Service Coverage Ratio is a ratio of a property’s annual net operating income and its annual debt obligations. A property’s annual debt obligations are principal, interest, taxes, insurance, and HOA (if applicable), also known as PITIA.
The DSCR formula is the annual gross rental income divided by the annual debt obligations of the property.
Lenders use the DSCR to analyze how much of a loan can be supported by the income coming from the property as well as to determine how much income coverage there will be at a specific loan amount.
HOW DOES A DSCR LOAN WORK?
HOW IT WORKS
- Qualified off property debt service ratio or cash flow
- Generally a DSCR of 1 or 1.25 is required
- As little as 20% on down payments
- Interest-only option available
- No reserves required on cash out loans
Key Points
- No income or job history verification required
- Qualified off property’s cash flow or Debt Service Coverage Ratio
- Generally a Debt Service Coverage Ratio of 1 or 1.25 required
- Potentially quicker closing times
