DSCR Mortgage Loans

In this guide, we will cover DSCR Mortgage Loans. We will discuss what DSCR mortgage loans are, who benefits from DSCR mortgage loans, and how DSCR mortgage loans work. In the following paragraphs, we will be covering every aspect of DSCR mortgage loans and how the team at Non-QM Mortgage Brokers can help you get DSCR mortgage loans to suit your needs. We will show you how DSCR mortgage loans is a great mortgage option for real estate investors buying investment properties.

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What Are DSCR Mortgage Loans?

A Debt Service Coverage Ratio (DSCR) is a type of loan for individuals that want to use investment earnings, rather than personal income, to qualify for a mortgage. This is a way of calculating a person’s cash flow vs. its debt obligations. Debt Service Coverage Ratio loan is a Non-QM loan, meaning that it is a non-qualified loan. DSCR Mortgage Loans does not meet the regulations and guidelines for a qualified loan. This type of loan is one of the only types of loans where a borrower does not need income verification.

Qualified Versus Non-Qualified Mortgage Loans

For a loan to fall under the qualified umbrella, it has to meet agency standard documentation requirements; as most mortgage loans are sold to Fannie Mae and Freddie Mac, a lender wants the loan to fall into the qualified category. A qualified mortgage has specific criteria that make the loan less risky for lenders and borrowers. Because of the stringent criteria set by conventional and conforming loans, it is often difficult for real estate investors to qualify.

How do Debt Service Coverage Ratio Mortgage Loans Work?

The DSCR loan is for real estate investors and mortgage brokers who want to qualify for a mortgage loan based on the income from their investment properties, using a company, corporation, multifamily, or commercial real estate. They use this income instead of paystubs, tax returns, or other supporting documents, including employment information. Lenders use this DSCR to help these people qualify because investors’ proof of income or tax returns do not always accurately show their real income due to business and write-offs.

Who Are DSCR Mortgage Loans Suitable For?

The DSCR loan is a good fit for investors who want to buy and hold real estate and self-employed borrowers with complicated incomes who would have intricate tax returns. The work world has changed throughout the years, and more and more individuals are investing in properties in order to make a living. Ideally, the person who wishes to purchase an investment property should be financially stable and expect a return on their investment.

What Types of Properties Are Suited For DSCR Mortgage Loans

DSCR mortgage loans are for people who want to acquire long-term and short-term rentals. These can be single-family homes, multi-family homes, condo units, townhomes, or condotels. You can even purchase mobile homes and vacant land. However, these loans can not be used for primary residences. This loan is not usually used for building a single-family home or a multi-family property. Additionally, there are no limits on the number of investment properties you can have. You can have multiple of each type if you choose.

What Ratio Do Buyers Need to Qualify For DSCR Mortgage Loans

The income is calculated only on the property’s cash flow, and as long as the total housing payment for the rental property does not exceed market rent, the income is enough. A DSCR is calculated by dividing net operating income (NOI) by total debt service (TDS). The net operating income is a property’s income after all operating costs are deducted.

What Is The Total Debt Service Ratio

The total debt service is the culmination of all loan payments, including principal, interest, sinking funds, and lease buyouts. Most lenders want to see that the borrower has a DSCR of 1. The score would show they would be able to make payments. As it goes up, let’s say to 1.50, it would demonstrate that the borrower would have plenty of wiggle room to make the payment. The lenders will look at your PITIA (also Net Operating Income) PITIA means property, interest, taxes, insurance, and association fees.

DSCR=Rental Income/PITIA

As an example, if the rental income was $1,000. The principal and interest are $550, taxes and insurance are $200, and association fees are $50 monthly. All the PITIA added up is $800.

1000 (Rental income)/800 (PITIA)= 1.25 DSCR.

Anything less than a 1 indicates that your property is in the red and not generating enough money to cover the debts. Different lenders will have other DSCR metrics and scoring.

How Is Loan To Value Ratio Calculated

The loan-to-value ratio is the difference between the loan amount and the market value of the home. For DSCR Mortgage Loans, the Loan Value (LTV) ratio that is usually required is 80%, and you will generally need 20% down on the loan. If you do end up putting a lesser amount down, your interest will go up.

How Is Debt to Income Ratio Calculated

A debt-to-income ratio (DTI) is the percentage of your gross monthly income that you pay towards your monthly debt payment. This includes debt such as student loans, auto loans, credit cards, and personal loans. With a DSCR loan, the individual Debt to Income (DTI) ratio is not factored in. This also means that they will not look at your employment or income.

Credit Score Guidelines on DSCR Mortgage Loans

Although the lender will not check your personal income information in a DSCR loan, they will check your credit score. You will want to take a look at your credit score before applying for a loan in order to address any discrepancies. You do not wish to have your credit report full of issues and not realize it until a lender pulls your score. You can dispute any charges with the Credit Bureau, but it does take time. The typical score required for this loan type is 640, similar to a credit score for a regular investment property loan.

Case Scenario for DSCR Mortgage Loans

This requirement can vary depending on the lender and other circumstances.

For example, if you have a 640 credit score=80% of price/value

600-639 credit score=75% of price/value

Additionally, you can’t be late on any debt within the last year. This will show up on your credit report.

Employment Guidelines on DSCR Mortgage Loans

Although you will not need to supply income verification other than the rental income, you will have to provide employment verification. This is typically a verbal verification, and there are instances when this can be waved. An example of how this can be waved is if you can verify that you own at least six investment properties within three years. A lender still wants to know that you are gainfully employed.

Fees and Costs on DSCR Mortgage Loans

A DSCR loan often comes with higher fees, including origination fees and points. The origination fee is a percentage of the total loan amount. The appraisal fee is paid for by the borrower and usually is between $300-$500. It will also include lender, title, and escrow fees, the same as a conventional mortgage.

Do DSCR Mortgage Loans Come With Prepayment Penalties?

Unlike other loans for investment properties, a DSCR loan might have a prepayment penalty. You need to review your loan details to determine this.

What are some benefits of the DSCR Loan?

A buyer can obtain many loans for different properties at the same time.
DSCR loans have quicker and easier application times (this is because they do not need all the same documents as traditional loans.
Unlimited cash out a borrower can take out as much money as they need
Personal income is not taken into account by lenders
This type of loan is suitable for individuals who are new or experienced real estate investors
Depending on the lender, the maximum loan amount could be in the millions.
You can buy properties under an LLC, a limited liability company.

Down Payment Requirements on DSCR Mortgage Loans

The amount of the required down payment is based on your credit score, but if you are a first-time investor, you can add 5% of the property sale price to the amount you will owe down.

Six-month SOFR DSCR Loan

This DSCR loan is also a Non-QM Loan. SOFR is an acronym for Secured Overnight Financing Rate. This is the index used to calculate the interest rate on most adjustable rate mortgages. The six-month SOFR adjusts every six months, based on the 30-day SOFR at that time, hence the name six-month SOFR.

This is appealing because the rate and payment will start out lower than a fixed-rate mortgage. This loan is best for borrowers who need a short-term loan. This type of loan requires a credit score of 680 and can only be used for long-term rentals. The application process is similar to a traditional DSCR loan, and this loan has a maturity of 5 years and a maximum loan-to-value ratio of 75%. Typically, you will need a DCSR score of 1.25.

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Global DSCR Loans

If a borrower does have good financial standing, good credit, and access to all their income and tax financial information, they could use a Global DSCR loan. This is a type of DSCR that does take into account the borrowers’ finances. This could be good or bad, so you would want to use only this loan type if their financial details are in order.

DSCR Loans for Foreign Nationals

If you live outside of the United States, you can still get a DSCR loan. The idea is that if the borrower can prove that the property has earning potential, they can still qualify regardless of where they are in the world. The process can be complex and might have higher interest rates. To help with this, there are Certified International Property Specialist real estate agents.

Other Alternative Mortgage Options To DSCR Mortgage Loans

There are alternatives to the DSCR loan. An idea of what is out there will be helpful in making your decision. An Asset-based loan also does not require an income check as it is based on assets. Businesses use these loans. A Bank Statement Loan would be another option and is based on bank statements instead of tax returns. Bank Statement loans do have stringent criteria and a potential borrower will need to prove at least two years of self-employment.

Applying For DSCR Mortgage Loans

Finding the right people to assist you will make this process much more manageable. In order to apply for a DSCR loan, you should first find a real estate agent. The real estate agent will assist you in determining how much you can afford and be the contact person for lenders. You will want to find an excellent DCSR loan lender.

It is recommended that a borrower look around and really search for the appropriate lender. Ultimately, the lenders all want you to do with them, so they will be more willing to work with you if you have done your homework. Along with your real estate agent, the lender will look to ensure you get the best deal. The lender will figure out your DSCR and explain all aspects of the loan terms to you, including fees, value, etc.

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DSCR Mortgage Loan Process

You will need an appraiser and a property inspector. The appraisal will help ensure that you are paying the right price for the property and also protects the lender. All property purchases require an appraisal. The lender will want to ensure that if you default on the loan, they can make their money back through the property. They will not want to loan out money on a property that is not worth the amount.

Appraisal on DSCR Mortgage Loans

An appraiser will check the area where the property is located, surrounding building values, and the property itself. An inspector will check the physical property to ensure that there are no unknown significant issues that will be costly to repair.

It is also worth it to get pre-qualified. When getting prequalified, it helps the lender know your situation more thoroughly and can say whether or not you are likely to get approved. If you do get prequalified, you can then get pre-approved. This is confirmation that you will actually get the loan.

DSCR Mortgage Loan Application Process

When it is time to fill out the paperwork, you will be asked for information about your business or rental property but not your personal income. Once the paperwork is completed, the process usually goes faster than a traditional loan. If approved, the lender will provide the loan estimate, including monthly payment, closing costs, and interest rate. You will need to pay for the appraisal of the property and submit it to the lender. The underwriting process begins, and you can close once you sign the final documents! To start on your DSCR mortgage loan application process, you can contact us at Non-QM Mortgage Brokers at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com.

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