Debt Service Coverage Ratio (DSCR)
If you’re interested in becoming a landlord and need financing for your rental property, consider a Debt Service Coverage Ratio (DSCR) loan, also known as a 30-year fixed rate loan.
DSCR loans provide financing based on a property’s expected cash flow. This makes financing more accessible than standard loans, which base financing on factors such as investor’s personal income and certain property requirements.
What is a DSCR Loan?
There are a handful of options to finance an investment property. Loans differ based on their qualification requirements and terms they offer. The best loan for you will depend on your individual needs.
With a DSCR loan you can qualify for a loan based on the cash flow you will receive from the rental property. This means you can get financing based on the money you will make from the investment property, rather than your current personal income.
As a non-QM loan, (non-qualifying mortgage) a DSCR loan helps real estate investors get financing with non-traditional forms of income. It allows for more qualification flexibility because it doesn’t have to meet the documentation requirements that the Consumer Financial Protection Bureau sets for standard conventional loans.
DSCR loans are often more accessible as you can qualify without using your tax returns, employment verification, W-2’s, etc. It allows for a no-income loan with more flexible qualification requirements for new and experienced investors, while also providing competitive interest rates and the ability to close in 2-3 weeks.
Submit Your DSCR Loan ScenarioHow to Get a DSCR Loan
If you’d like to see whether you qualify for a DSCR loan, connect with us. To get you started, we’ve outlined the steps and qualifications needed to help you understand the process.
The Financing Process
By sharing basic information about your potential purchase or refinance, we’ll work with you to see if a DSCR loan meets your needs and whether your situation qualifies.
As we move through the process we’ll discuss the terms you qualify for and your financing options, as well as request the necessary documentation.
We’re with you through each step, leading to a simple and efficient closing so that you can move forward and start cash flowing with your rental property.
DSCR Loan Requirements to Meet
These are some of the common requirements often needed to qualify for a DSCR loan. If you have questions about these, we’re here to help.
- We’ll need to know what the expected leverage is for the property, whether the loan is for a purchase or refinance. In most cases, the DSCR ratio needs to be above 0.75
- You’ll need to provide the annual property tax information for the investment property, as this will be considered when calculating your potential loan.
- You’ll need to provide annual insurance information for the property.
- You’ll need to meet requirements for credit score, down payment, liquidity, and reserves.
DSCR Loan FAQs
Financing a property is an important step in reaching your investment goals. It’s normal to have questions. We’ve compiled answers to the frequently asked ones, but don’t hesitate to ask more.
DSCR loans provide long-term financing options for investment properties that will have tenants occupy them as either a short-term or long-term rental. These loans are financed based on rental cash flow, rather than meeting standard requirements such as monthly income amount or employment verification.
DSCR lenders also don’t need to limit the total number of rental properties you finance. DSCR loans can be given to an LLC, rather than an individual, which isn’t possible with standard mortgages.
Although your personal income isn’t considered for financing, you will need to share your credit score to get approved for a DSCR loan.
The minimum requirements vary depending on the situation but a credit score of 640 or higher is often required. If you do not meet that credit score minimum, you can partner with someone who does to get the deal funded
The broad definition of “debt service” is the cash that is required to cover repaying interest and principal for a debt during a set period of time. Borrowers and lenders use the Debt Service Coverage Ratio to measure the ability to repay the annual debt service compared to the net operating income generated by the property.
It’s one measurement that helps determine what maximum loan amount you can get. It can help you and a lender understand whether a property generates enough income to cover the cost of a new loan.
Calculating the Debt Service Coverage Ratio helps to estimate how much an investment property can rent for to help predict the property’s value.
To calculate it, you need to divide the net operating income of the property you want to finance by the total debt service. Net operating income is the revenue minus certain operating expenses. Debt servicing is the cash that is required to cover repaying interest and principal for a debt during a set period of time.
A larger DSCR means there is more income to service the debt, making it more likely you’ll qualify for the financing you want. A DSCR ratio of 1.0 means you are breaking even.
There are closing costs associated with processing any loan. They include costs for the lender to service the loan, as well as an appraisal and other fees.
You’ll also need to make a down payment that will be paid at closing. This is typically 20-30% of the loan amount. To qualify for the loan, you’ll need 3 months reserves in a liquid format.