DSCR Loan Programs have become extremely popular in recent years, and it’s because of the simplicity of the approval process. These loans are available for seasoned investors as well as first time real estate investors. Today we cover everything you need to know about getting approved for a DSCR Loan Program.
What is a DSCR Loan?
A DSCR Loan Program is a way for real estate investors to get mortgage approval based on property cash flow, NOT personal income.
This means your tax returns and pay stubs are not required at all.
DSCR stands for: Debt Service Coverage Ratio
Debt service coverage ratio is the ratio of operating income available to debt servicing for interest, principal and any other payments liable on the property (HOA dues, etc.).
In basic terms: rental income divided by the mortgage (including taxes, insurance, HOA) = the Debt Service Coverage Ratio
Example:
Monthly rental income: $2,300
Mortgage payment with taxes and insurance: $1,950
2,300 / 1,950 = 1.18
In this case your DSCR is 1.18
Typically, lenders want to see a DSCR of at least 1.00 (but there are exceptions, and I’ll cover that below)
What is the advantage of getting a DSCR Loan Program?
When it comes to mortgage approval, simplicity is everything.
In today’s market, for a real estate investor, there is nothing more simple than a DSCR loan.
With a DSCR loan program you do NOT have to provide:
- Tax returns
- W-2s
- Paystubs
- Verification of employment
Not having to provide personal income documentation is a major way to eliminate unnecessary conditions, and can save substantial time.
Keep in mind: The income portion of the mortgage approval is based on property cash flow, but the assets and credit for the borrower will still be evaluated like a traditional mortgage.
How does the DSCR Loan Program work?
Just like any mortgage, you’ll submit your loan application.
But with the DSCR loan, you’ll exclude any employment information or history.
The lender will pull your credit and review your assets.
When the appraisal is ordered, there is also a 1007 rent schedule that is added to the order. The 1007 rent schedule is a form the appraiser fills out to evaluate and report fair market rent.
The fair market rent that is calculated is the figure that is used to calculate your debt service coverage ratio (DSCR).
If the existing lease exceeds the market rents, the lease may be used to calculate the DSCR as long as the lease will continue for 6 months after the new mortgage note date, and the most recent 2 months rent payments were received on time.
DSCR Loan Program | Standard
The standard product would apply if you’re purchasing an investment property or refinancing a rental that can show the fair market rent or current rent can cover the mortgage payment including taxes and insurance (DSCR of 1.00 or above).
- Purchase – Minimum down payment is 20%
- Refinance – Maximum loan to value ratio is 80%
- Cash Out Refinance – Maximum loan to value ratio is 75% (must have owned the property for at least 12 months)
- Credit score as low as 600
- No bankruptcy or foreclosure in the last 4 years
- Minimum loan amount is $100,000
DSCR Loan Program | No Ratio
If the property cannot show that the market rent covers the mortgage with taxes/insurance, a No Ratio program is likely your best solution (DSCR of 0.00 – 0.99).
- Purchase – Minimum down payment is 25%
- Refinance – Maximum loan to value ratio is 75%
- Cash Out Refinance – Maximum loan to value ratio is 70%
- Credit score as low as 620
- No bankruptcy or foreclosure in the last 4 years
- Minimum loan amount is $150,000
What to Expect
With this alternative loan type, you can still expect the loan to be fully underwritten (with the exception of personal income).
That means your assets and credit will need to be fully verified, and the property needs to meet lender requirements.
The best thing you can do to set yourself up for success for this type of loan (and every loan for that matter) is to provide exactly what the lender asks you for. Do not send in partial bank statements, missing pages, or expired documents.
Providing complete and clear documentation will speed up the process and reduce the need for additional or multiple requests for the same conditions.
In Summary
The advantage of NOT having to provide tax returns or any personal income documents is a major benefit for investors who are looking to start or grow their real estate portfolio.
This is a great option if the property pays for itself. Also, as mentioned, even if it doesn’t pay for itself, the No Ratio product may be a great solution for you.
The DSCR loan is available for real estate investors on:
- Purchase
- Refinance
- Cash Out Refinance
- Single family homes, condos, townhomes, and 2-4 unit properties
- As low as 600 credit score (depending on loan to value ratio)
First time investors are considered on a case-by-case basis.
I invite you to reach out.
Get your questions answered.
We have been successful with getting many borrowers approved all over the country, even when other lenders said it wasn’t possible.
If for some reason we cannot help, we’ll do our very best to point you in the right direction.
