What is a DSCR Loan?
Debt service coverage ratio (DSCR) loans are a type of loan that is based on the ability of a property’s rental income to cover the annual debts of that property. Instead of facing strict lending requirements that box out a lot of borrowers, DSCR loans give investors a different way to qualify for property investment funding.
DSCR loans are considered non-QM loans, which means they’re loans that don’t require borrowers to go through the normal qualifying mortgage process. This process is what makes it difficult for many borrowers to secure the funding needed to invest in property because it requires them to qualify based on tax documentation and proof of income, which many borrowers—especially budding investors—don’t have.
While DSCR loans are much more flexible than conventional mortgages, it’s important to keep in mind that there are limits to what kinds of properties you can invest in with DSCR loans.
FAQ Regarding DSCR Loans
What are the Eligibility Requirements?
Debt service coverage ratio loans are considered more flexible than other loans in terms of who qualifies, there are still certain eligibility requirements you need to meet. Of course, the most important eligibility requirement in terms of DSCR loans is your DSCR ratio; this is the number lenders look at to determine if you qualify.
Once you’re approved based on your DSCR, keep in mind that you’ll also need to make a down payment. With Investment Finance Partners, you can secure a loan with a down payment as low as 20%, but that depends on the terms of your loan.
What is considered an Eligible Property?
Different types of loans are meant for individual purposes, and DSCR loans are specifically designed for property investors. What this means is that you can only use DSCR loans to invest in rental properties. This is because your DSCR ratio assumes that you’re investing in a property to rent it out, using the rental income to pay back your loan.
While DSCR loans can’t be used to purchase owner-occupied properties, there are other types of non-QM loans you can use to purchase a home.
What do DSCR Lenders look for?
Considering your DSCR ratio is formula lenders use to determine your loan eligibility, you should know what lenders are looking for in terms of DSCR. It’s also important to note that different lenders have their own standards when it comes to DSCR ratios. For the most part, however, DSCR loans require a ratio of at least 1.1. One of the most notable benefits of applying for debt service coverage loans is the fact that we have more flexible standards. If your DSCR ratio is higher than 1.1% , you may be eligible for lower interest rates and other more favorable loan terms.
How do you calculate DSCR?
The first thing a lender will do when you apply for a DSCR loan is calculate your DSCR ratio. The good news is, calculating your DSCR is fairly simple, so you can make sense of the number your lender gives you when you apply. Here’s the formula for DSCR:
Debt service coverage ratio (DSCR) = annual rental income ÷ annual debt
That might sound a bit complicated, but it’s simpler than it seems. Here’s how we determine your DSCR at Griffin Funding:
We start by calculating your annual rental income, which means using lease agreements and getting an estimate from an appraiser. We take the lower of these two numbers and use it as your rental rate.
Once we’ve got your rental income, we look at your annual debt. This is the amount you pay toward the principal, interest, taxes, insurance, and HOA payments if applicable.
Finally, we divide your rental income by your annual debt, which provides us with your DSCR ratio. If your rental income and annual debt are the same, your DSCR will be 1.
How do you calculate DSCR?
DSCR loans aren’t just for people who can’t qualify for other types of loans; there are actually lots of good reasons to consider DSCR loan.
Here are some of the key benefits of DSCR loans:
You can qualify without proof of income or employment history verification
Your closing time may be faster
Interest-only loans are available
You can invest in an unlimited number of properties
Loan amounts can be up to $5,000,000
Investment Finance Partners offers competitive interest rates and down payments as low as 20%
Cashout refinance options (use cash to buy more investment properties)
Fixed-rate loan terms of 30 years