Debt Service Coverage Ratio (DSCR) Loans
Are you looking to acquire a Debt Service Coverage Ratio loan, also known as a DSCR investment property loan?
Here’s how to avoid using hard money and qualify for investment property acquisitions and refinances by using the cash flow of the investment property itself.
DSCR Loan Details
Traditional mortgage lending requires tax returns during the loan approval process, a Debt Service Coverage Ratio loan for investment property financing do not.
Providing tax returns does not always give an accurate portrayal of true cash flow, due to the way traditional loans are underwritten (which often applies a default vacancy factor, minimum global debt service, and other guidelines and overlays). Real estate investors and others whose tax returns do not accurately portray their financial picture can use no tax return investment property loans as a powerful financing solution.
This is a great option for real estate investors that allows qualification based on simply the cash flow of the property being financed. If the rental property is cash flow positive, that will constitute sufficient qualifying income.
Sometimes called “Investment property loans”, “DSCR loan” or “rental loans,” Debt Service Coverage Ratio investment property loan does not consider a borrower’s income in the traditional sense.
The “cash flow” is just the monthly rental amount the property brings in. For example, a property renting for $2,000/month would be attributed a qualifying income of $2,000/month. The main requirement for these investment property loans is that the monthly rents cover the monthly expenses. It is that simple.
Not only is a borrower’s income not considered in the loan application process, investment property lenders do not request income amounts, in fact there is no income verification of any kind. No letters from employers, no W2s, and no pay stubs. Again, the income of the investment property is simply the cash flow of the property.
Traditional mortgage lenders require tax returns, W-2s, and paycheck stubs in order to determine monthly income. Salaried and hourly borrowers would require the lenders to look at gross income for qualifying purposes. But for self employed borrowers, traditional mortgage lenders look at net income, the adjusted gross income showing on tax returns. This puts real estate investors and other self employed borrowers at a disadvantage.
However, rental loans are a great way for real estate investors to qualify for both acquisitions and refinances, without requiring bank statements or tax returns, and without having to qualify using a debt to income ratio. (Bank statement loans are also a great option for self employed borrowers, to learn more about bank statement loans click here.)
Borrowers that fall outside traditional underwriting guidelines but are looking for long term loans with more attractive rates than hard money loans can use the DSCR investment property loan to their advantage. These loans do not require tax returns, income or employment, or debt to income ratio calculations.
DSCR loans provide the flexibility and lessened documentation of hard money loans, but with rates closer to traditional financing.
This is a constantly evolving area of real estate financing that offers a powerful way to grow your real estate portfolio.
- Pros
- No tax returns required
- No employment or income required
- Personal or business income not considered
- No debt to income (DTI) ratio developed or considered
- Allows real estate investors and self employed individuals to qualify when they otherwise cannot
- Cons
- Larger down payment than traditional loans
- Rates are slightly higher than traditional loans (but not much more)
- Some (but not all) lenders require landlord experience
- Personal credit still plays a role
DSCR investment property loans (DSCR Loan) are a great way to avoid hard money with a viable long term financing solution for real estate investors. The lessened documentation and underwriting requirements are similar to hard money loans, while rates and fees are more akin to traditional loans.
Whereas traditional mortgage lending requires tax returns during the loan approval process, investment property loans do not. With these loans, real estate investors are able to purchase or refinance a property with no employment required, no personal income considered, and no debt to income ratio developed. The only cash flow that matters is the rental income. That’s it. If the property debt services, the property will qualify.