About DSCR Loans (Debt Service Coverage Ratio Loans)
What is a DSCR loan?
DSCR stands for Debt-Service Coverage Ratio which is a formula used to determine if there is enough cash flow from rental income received on the property to “cover” or “service” the outstanding monthly debt on the property.
While it varies between lenders, typically anything between a 1.1 and 1.2 DSCR calculation is considered a sufficient cash flow to cover the outstanding monthly debt (meaning the rent is 110 to 120% of the monthly expenses).
Monthly expenses are typically principal, interest, taxes, insurance and any dues if part of a condo association.
The main benefit of these loans is lenders focus more on borrower credit and property cash flow and less about the borrower’s personal income. In a lot of ways these loans are considered “low” or “no doc” as compared to a more traditional conventional loan.
DSCR loan enables you to purchase or refinance a rental property without providing your tax returns, W-2s, pay stubs or other personal and financial documents that are required for a standard mortgage. In fact, most DSCR lenders do not verify your employment when you apply for the loan.
How does DSCR calculate loan amount?
The DSCR is calculated by taking the net cash flow divided by the annual debt-service payments at the requested loan amount. If the net cash flow is insufficient to cover the requested loan at the target DSCR, then the loan amount will be constrained by the minimum DSCR.
The process and documentation requirements for DSCR loans are much less.
Another benefit of a DSCR loan is that many lenders will allow borrowers to purchase properties in the name of an LLC or corporation which is typically something that conventional lenders will not allow.
This is highly beneficial to investors as holding a property in an LLC has potential tax benefits to the investor and reduces exposure from a liability standpoint.
We’re here to make the home loan process easier, with tools and knowledge that will help guide you along the way, starting with our DSCR Rate Qualifier.
The DSCR Loan Process
Here’s how our home loan process works:
- Complete our simple DSCR Rate Qualifier
- Receive options based on your unique criteria and scenario
- Compare mortgage interest rates and terms
- Choose the offer that best fits your needs