Borrowers who are interested in DSCR loans for primary residences often contact us. Is this a viable option? Can you live in a home bought with a DSCR loan as your primary residence?
Debt Service Coverage Ratio (DSCR) loans are designed for real estate investors looking to finance income-generating properties. These loans assess a property’s ability to cover its debt obligations through rental income.
While DSCR loans can be highly advantageous for investment purposes, they are not a financial product for primary residences.
This article explains why a DSCR loan for a primary residence is not feasible and explores alternative mortgage options for a home you can live in.
Start your application with Park Place FinanceWhat is a DSCR loan?
DSCR loans are a type of financing for investment properties.
The Debt Service Coverage Ratio measures a property’s cash flow relative to its debt obligations. It evaluates whether the property’s rental income is sufficient to cover mortgage payments, property taxes, insurance, and other related expenses.
How DSCR loans work
Lenders use the DSCR to determine the loan’s feasibility.
- A DSCR of 1 means the property’s income covers its debt exactly
- A DSCR above 1 indicates a surplus
- Alternatively, below 1 indicates a shortfall
For instance, a property with a DSCR of 1.25 generates 25% more income than its debt obligations, making it a safer investment for lenders.
DSCR loans typically require detailed documentation of rental income, lease agreements, and operating expenses.
Investors often use these loans to finance properties like apartment buildings, commercial spaces, and rental homes, where the income from tenants can reliably service the debt.
Why you can’t live in the home you purchased with a DSCR loan
Lender restrictions
Lenders specifically design DSCR loans for investment purposes and impose restrictions on using these loans for primary residences.
The terms and conditions of DSCR loans explicitly state that the property must generate rental income to qualify. A borrower living in this property type means the potential rental income has been significantly reduced.
Using a DSCR loan for a primary residence violates these terms, leading to significant legal and financial consequences.
Legal and financial implications
Misusing a DSCR loan by living in a property intended for investment can result in severe repercussions.
Lenders might demand immediate repayment of the loan, leading to potential foreclosure if the borrower cannot comply.
Additionally, the borrower may face legal action for fraudulently misrepresenting the property’s use.
Further risks and consequences
The risks of misusing DSCR loans extend beyond legal and financial penalties. The borrower could damage their credit score, making it challenging to secure future financing.
Furthermore, the lender might pursue legal action to recover losses, adding to the borrower’s financial burdens.
Alternative mortgage options for primary residences
Conventional mortgages
Conventional mortgages are popular among homebuyers and are typically offered by private lenders, such as banks and credit unions.
These loans are not insured or guaranteed by the federal government and often require a higher credit score and a bigger down payment than government-backed loans.
Conventional loan benefits:
- Lower interest rates
- More flexibility for terms
Eligibility requirements and benefits:
- Higher credit score requirement
- Down payments, possibly as low as 3% for qualified buyers
- Lower interest rates for those with good credit
- Flexible terms and conditions
FHA loans
These loans—backed by the Federal Housing Administration (FHA)— were created to help individuals with lower credit scores and smaller down payments.
FHA loan features:
- A low credit score (min. 580) and a 3.5% down payment might be accepted
- Easier qualification criteria
- Lower down payment requirements
VA loans
VA loans are available to:
- Veterans
- Active-duty military personnel
- Eligible spouses
These loans—guaranteed in this case by the U.S. Department of Veterans Affairs—offer numerous benefits, including no down payment and competitive interest rates.
VA loan features:
- No down payment required
- No private mortgage insurance (PMI)
- Competitive interest rates
Other lending options
In addition to the above traditional-style loans, other mortgage options cater to specific financial situations.
Hard money loans
Hard money loans are primarily used by investors looking for short-term financing options to purchase and renovate properties before selling them at a profit.
These loans are secured by the property rather than the borrower’s creditworthiness, making them accessible for projects and borrowers who might not qualify for traditional funding.
Bank statement loans
More tailored to self-employed borrowers, bank statement loan lenders evaluate income based on bank statements rather than tax returns or W-2 forms.
Bank statement loan features:
- Income verified through bank statements
- Flexible qualification standards
Bridge loans
Bridge loans provide short-term financing for homebuyers who must purchase a new home before selling it. These loans are typically used to cover the financing gap between buying a new property and selling an existing one.
Bridge loan features:
- Temporary financing solution
- Helps manage cash flow during property transitions
DSCR loans for primary residences: Conclusion
DSCR loans are designed for investment properties and unsuitable for primary residences. Violating the terms of a DSCR loan can lead to severe legal and financial consequences.
Instead, homebuyers should explore alternative mortgage options such as:
- Conventional mortgages
- FHA loans
- VA loans
- USDA loans
- Hard money loans
- Bank statement loans
- Bridge loans
With the right guidance, each option could be tailored to fit individual financial situations.
Park Place Finance has various lending options for most borrowers for their homebuying solutions.
Fill out our fast and easy online form to discuss your loan needs, or call us at (866) 407-1599 to speak with an account executive about your unique loan scenario.