What Is a DSCR Loan?
A Debt Service Coverage Ratio (DSCR) loan, also known as an Investor Cash Flow loan, is a non-QM (non-qualified mortgage) loan that allows you to qualify for a home loan without relying on your personal income. Instead, this type of loan bases its qualification criteria on the cash flow generated by your rental property. DSCR loans are particularly beneficial for real estate investors, as they can secure financing based on the rental property’s cash flow rather than personal income documentation like tax returns or pay stubs. Here's an overview of how DSCR loans work and the requirements to qualify.
How Does a DSCR Loan Work?
Traditional loans typically require proof of income through tax returns or pay stubs. In contrast, DSCR loans allow investors to qualify for a mortgage based on the rental property’s cash flow. Lenders use the Debt Service Coverage Ratio (DSCR) to assess whether the rental income from the property will be sufficient to cover monthly loan payments. The DSCR is a ratio that compares the property's income to its debt obligations.
In addition to the DSCR ratio, lenders may require a minimum credit score and a down payment, though specific requirements can vary. There is no cap on the number of DSCR loans you can obtain. This flexibility allows investors to finance multiple properties, making DSCR loans a versatile option for both novice and experienced real estate investors.
The DSCR Ratio
To qualify for a DSCR loan, lenders require a healthy DSCR ratio, which relates the property's income to its total debt obligations. A good DSCR ratio is typically one or above, indicating that the property's income is sufficient to cover its debt.
DSCR Formula = Monthly Rental Income / PITIA (Principal, Interest, Property Taxes, Homeowners Insurance & Association Dues)
Who Are DSCR Loans For?
DSCR loans are designed for investors in residential rental properties. They are suitable for both first-time investors and seasoned professionals with extensive portfolios. Investors use DSCR loans to purchase additional income-generating properties, making it an ideal loan type for those looking to expand their revenue streams.
What Is a Non-QM Loan?
A DSCR loan falls under the category of non-QM (non-qualified mortgage) loans. These loans cater to borrowers who do not meet the standard criteria for conventional mortgages. Non-QM loans often have different income and credit requirements and are suitable for various types of borrowers, including self-employed individuals, gig workers, and foreign nationals.
Types of Non-QM Loans:
DSCR Loans
Bank Statement Loans
ITIN Loans
Foreign National Loans
1099 Mortgage
Asset Qualifier Mortgage
Full Doc Loan
How to Qualify for a DSCR Loan
To qualify for a DSCR loan, lenders have specific criteria for both the borrower and the property. Here are the typical requirements:
DSCR Loan Requirements:
DSCR ratio of 1.0 and above
Credit score of at least 620 (some lenders may require higher scores)
Down payment of 20% (though some lenders may have lower requirements)
Minimum loan amount of $100,000
Maximum loan amount of $3 million
These requirements can vary by lender, and some may be willing to work with borrowers with different credit histories depending on the property.
Property Eligibility:
The primary concern for lenders is that the property generates enough income to cover its debt. DSCR loans are intended for income-generating investment properties, including single-family units and multi-unit structures.
Lenders typically look for:
Loan-to-value (LTV) ratio of 80% or lower
Appraisal report to assess the property’s value
Pros and Cons of a DSCR Loan
Pros:
Easier qualification compared to conventional loans, with no income proof required
Less documentation needed
Faster processing time
No limit on the number of DSCR loans
Jumbo loans available for high-end properties
Flexible loan terms
Cons:
Higher down payment requirements, typically 20% or more
Potentially high credit score requirements
Limited to income-generating properties
Prepayment penalties common
Dependence on tenant occupancy for cash flow
How to Get a DSCR Loan
Follow these steps to secure a DSCR loan:
Find a DSCR Loan Lender:
Not all lenders offer non-QM loans, so find one that does.
Complete a Loan Application:
Most lenders offer online applications. Alternatively, contact a loan officer directly.
Calculate Your DSCR Ratio:
Use the formula provided to ensure your property meets the requirements.
Get Approved and Lock in Your Interest Rate:
Upon meeting the lender’s criteria, you’ll be approved and can lock in your interest rate.
Receive the Loan and Make Repayments:
After approval, you’ll receive the loan and begin making monthly payments. Ensure your property is occupied to maintain cash flow.
Find the Right Mortgage Partner
Real estate investing can yield significant returns, especially with the right financing. DSCR loans are ideal for investors lacking traditional income documentation. Partner with a reputable mortgage lender to find the best DSCR loan options, flexible terms, and competitive rates aligned with your investment goals.
